Groups, Stakeholders Offer Mixed Views On Potential Uniform Standard for B-Ds, IAs

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By Maria Lokshin

Industry groups and other stakeholders have mixed views on a potential uniform fiduciary standard for broker-dealers and investment advisers, according to comment letters recently submitted to the Securities and Exchange Commission.

A fiduciary standard for broker-dealers could negatively impact retail customers and result in additional compliance costs for firms, some industry representatives warned. Investment adviser groups, on the other hand, voiced concerns that the SEC's possible rulemaking on the issue could yield a weaker fiduciary standard.

Request for Information
In March, the SEC released a long-awaited request for information on the potential costs and benefits of crafting a uniform fiduciary standard for broker-dealers and advisers (42 SLD, 3/4/13). Currently, broker-dealers operate under a “suitability” standard while advisers must adhere to a fiduciary standard.

However, Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directed the SEC to study whether all providers of personalized, retail investment advice should be subject to a uniform standard regardless of whether they are registered as broker-dealers or investment advisers. The impetus, in part, for the Dodd-Frank provision was the notion that the separate standards may create confusion for retail customers.

In 2011, SEC staff released a study recommending that the commission move forward with rulemaking to implement a uniform fiduciary standard for those who advise retail clients (16 SLD, 1/25/11). A year later, former SEC Chairman Mary Schapiro said the SEC was preparing a request for information because data to inform the rulemaking may not be publicly available. The initiative stalled, however, because of a lack of support from commissioners.

In its March release, the SEC stressed that it has not yet decided whether rulemaking is warranted. The comment period for the request for information closed July 5.

SIFMA's Estimates
In a July 5 letter to the commission, the Securities Industry and Financial Markets Association said it generally supports a uniform standard for brokers and advisers, adding that the benefits of such a unified standard for clients are “fairly self-evident.” The group noted, though, that the costs of shifting to a fiduciary standard for broker-dealers are currently difficult to quantify because “the ability to do so depends on the specific manner in which the SEC elects to implement the standard.”

“In the absence of a concrete proposal, it is not possible to adequately identify and estimate all the costs of establishing a uniform fiduciary standard,” SIFMA said.

However, the group said it conducted a survey of 18 member firms that narrowly focused on two potential areas of increased cost--enhancing disclosure and developing and maintaining a comprehensive compliance and supervisory system to implement the new standard.

According to SIFMA, the firms were asked to estimate costs for a potential new “relationship guide” similar to Form ADV Part 2A, the disclosure form currently required for investment advisers. While the group said that responses about potential costs “varied significantly by firm,” seven of the largest firms surveyed estimated that it would cost between $1.2 million and $4.6 million to develop and maintain such a relationship guide for the first year. To maintain and update the guide beyond the first year, it would on average cost $631,000 per firm annually, according to 12 of 16 firms that responded to the question.

As for a compliance and supervisory system, SIFMA said to get such procedures up and running would cost between $1 million and $6 million for one year, based on data from nine firms. It would cost roughly $2 million annually to maintain and implement those systems, procedures, and programs according to data from 12 firms.

Meanwhile, the group said the SEC should not layer on the current fiduciary standard for advisers, as interpreted under the Investment Advisers Act, to broker-dealers. Instead, SIFMA said, the commission should promulgate new rules and guidance to enable broker-dealers to transition to a uniform fiduciary standard.

“Because of fundamental differences between BD and RIA roles and business models, attempting to apply Advisers Act guidance and precedent to BDs without further clarification and interpretation by the SEC would create a high risk of confusion and misapplication,” the group wrote.

'Middle-Market Households.'
In a separate letter to the commission, the National Association of Insurance and Financial Advisors said that based on several surveys of its members, the imposition of a fiduciary standard on broker-dealers would result in higher regulatory compliance costs and therefore higher prices for clients. According to the group, the majority of its members are community-based small business owners that cater to “middle-market households.”

One survey cited by the group found that if compliance costs rose by 15 percent, 65 percent of NAIFA members would be forced to reduce services offered to “less-wealthy clients,” hike fees, or “stop offering securities altogether,” among other consequences. Currently, the letter said, member firms devote roughly 500 hours and $9,000 annually to compliance and securities exams.

The group further noted that consumers are generally satisfied with separate models for brokers and advisers. “We respectfully recommend, therefore, that the SEC not take any action that would amount to an attempt to cure a problem that has not been demonstrated to exist, and which could have the unintended effect of reducing the access of middle and lower income market investors to needed financial products, services, and advice.”

Others, meanwhile, raised concerns that the SEC's potential rulemaking could weaken the existing fiduciary standard for advisers. In a July 3 letter to the SEC, the Investment Adviser Association said it was “concerned that the Commission's Request signals an inclination to 'water down' the Advisers Act fiduciary standard.”

Specifically, the trade group said, among other issues, the request for data suggests that “disclosure alone” would satisfy the requirements of a fiduciary standard. The letter also cited concerns that the SEC “appears to be approaching its initial consideration of the uniform standard of conduct and other regulatory harmonization from the perspective of applying broker-dealer rules to investment advisers, while only sparingly mentioning the possibility that investment adviser regulation should apply to brokers that provide advice.”

“We would oppose wholesale application of 'check-the-box' broker-dealer regulation to investment advisers,” the group said.

In a June 27 letter to the SEC, Massachusetts Secretary of the Commonwealth William Galvin urged the agency to consider the possible harm to consumers as it mulls the costs and benefits of the possible rule.

“I urge the Commission not to capitulate to industry advocates and the courts that would regulate investor protection to a 'bean counter' analysis concerned with the quantification of industry costs to the exclusion of the warm-blooded investor,” Galvin wrote. “While you cannot put a price on investor protection, you can gauge the price paid by investors from the losses they suffer under the current system, where brokers make recommendations under a 'suitable investment' standard.”

Massachusetts advisers, the letter noted, are “adamantly opposed” to “watering down” the current fiduciary duty standard under the Advisers Act.


Comment letters on the SEC's request for information can be seen at

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