Rulebook

The SEC Needs to Fix the Problem It Created

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The Securities and Exchange Commission could’ve fixed the problem around the fiduciary standard years ago. Even before Dodd-Frank, the SEC had the authority it needed under the Investment Advisers Act to say that brokers who wanted to act as advisors would be regulated appropriately, said investor advocate Barbara Roper, during a webinar for The Institute for the Fiduciary Standard.

“The problem is that investors, who are in the market for investment advice, are being actively deceived, and SEC regulatory policy permits that deception,” said Roper, director of investor protection at the Consumer Federation of America. “But brokers aren’t, in fact, advisors, at least not legally. They’re salespeople.”

The SEC is permitting brokers to deceive investors about the nature of the service they are offering by not regulating them—holding them to a fiduciary standard—as other advisors.

“This is not a problem that is created by the statute that governs broker/dealers and investment advisors,” Roper said. “It is a problem that has been created by the SEC’s misguided interpretation of those statutes over several decades.”

SEC Chair Mary Jo White expects the commission to decide whether to move forward with rulemaking around a uniform standard of care this year. Yet Republican Commissioners Daniel Gallagher and Michael Piwowar question the need for rulemaking, Roper said.

“This should not be a partisan issue,” Roper said. “Rooting out misrepresentations, promoting fair competition, harnessing market forces to benefit rather than harm investors is a policy that should be able to win bipartisan support. But if Chair White must take a three-two vote to bring it about, so be it.”

Another obstacle in getting a rule out there has been the SEC’s reluctance among the staff, in particular within the division of trading and markets, to acknowledge any problem with the current policies, Roper added. In addition, the agency’s recent request for information defined fiduciary duty with no mention of the best interest obligation.

“To overcome that obstacle, the SEC will need to be willing to put oversight of this rulemaking process in the hands of individuals within the agency who support the project and are committed to adopting a rule that does not water down the existing fiduciary standard for personalized investment advice.”

Large firms that have a broad array of product offerings will adapt easily to a fiduciary standard. It’s the smaller firms with limited product menus, such as insurance firms, that will find it difficult to adjust.  

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