White Says SEC Should Act on Fiduciary Rule for Brokers, Advisers

U.S. Securities and Exchange Commission Chair Mary Jo White said on Tuesday she supports crafting new rules to harmonize the differing standards that govern how retail brokers and advisers offer investment advice.

White’s announcement, made at a Securities Industry and Financial Markets Association conference (SIFMA) in Arizona, mark the first time she has offered an opinion on the controversial subject since taking charge of the SEC in 2013.

“That’s what I think is the right thing to do,” said White, according to a video of the event.

White did not offer many details. But generally the rule would harmonize disjointed standards of care between investment advisers, who must act in a client’s best interest, and brokers, who are held to a lower “suitability” standard.

Some say these differences may confuse investors and fuel conflicts, because brokers may sell products that benefit their bottom lines even if they are not the best choice for clients.

In addition, White said any new rules must also accompany a program to beef up examinations of advisers by creating a third-party compliance program to help supplement the SEC’s own exams.

Currently, the SEC is able to examine only a fraction of the country’s advisers every year. Brokers get inspected more frequently because they have a self-regulatory organization.

White’s comments could influence a raging debate in Washington over parallel rules that the U.S. Department of Labor is planning to release for brokers who advise clients on individual retirement accounts.

The Labor Department’s rules would aim to reduce conflicts of interest and ultimately cut back on the fees charged to investors by holding retail brokers to a higher “fiduciary” standard, meaning they would be required to put their client’s financial interests first.

The SEC and the Labor Department are each governed by different laws and can act independently, but many brokers including Wells Fargo, Charles Schwab and Raymond James would be covered by both rule sets.

Many Wall Street trade groups have decried the Labor Department’s actions, saying the SEC should take the lead.

Brokerages also prefer the SEC because the 2010 Dodd-Frank Wall Street reform law explicitly protects their ability to earn commissions.

The Labor Department, while under pressure to preserve commission-based compensation, does not face the same legal obligation.

Several years ago, the Labor Department scrapped a first draft of a proposed fiduciary rule after the industry complained it would limit investors’ access to retirement investment products and curb brokers’ compensation.

The SEC, by contrast, has been studying the issue, but until White’s comments Tuesday, the agency had not signaled whether it might proceed with its own rules.

Last month, President Barack Obama waded into the debate in an effort to rally support for the Labor Department, which is expected to release a new draft in the near future.

Ira Hammerman, the general counsel at SIFMA, said in an interview with Reuters that he is encouraged by White’s comments. “We would hope that the SEC’s moving forward on this would provide further confirmation that the DOL should not move forward,” he said.

SIFMA has been among the many staunch critics of the Labor Department’s efforts.

On Monday, it unveiled a study that found that the White House’s economic analysis justifying the Labor Department’s rule was riddled with errors.

White House spokesman Josh Earnest brushed aside the study’s findings in a briefing with reporters on Tuesday and reiterated Obama’s call for new rules. “This seems like a pretty common-sense thing,” he said.

Whether the SEC’s action will influence the Labor Department’s rule remains to be seen.

The SEC is only in the early stages. White said Tuesday that the task is complex and that she will start discussing it with commissioners.

Two of them – SEC Republican Commissioners Daniel Gallagher and Michael Piwowar – have previously raised strong reservations about crafting fiduciary rules.


Source: Reuters