A Split Over Protecting Investors; The Labor Department is moving ahead of the SEC on broker rules; The financial industry is resisting attempts to require brokers to put clients’ interests ahead of their own


A Split Over Protecting Investors; The Labor Department is moving ahead of the SEC on broker rules

byDave MichaelsRobert Schmidt

1:23 AM SGT
March 13, 2015

The Obama administration wants the Department of Labor, which oversees employee savings plans such as 401(k)s, to propose sweeping regulations that would curb conflicts of interest among brokers who handle investments for people saving for retirement. The Securities and Exchange Commission has long considered imposing similar rules on all brokers but so far shows no sign of enacting them.At issue is whether brokers should adhere to a fiduciary standard—which would require them to put clients’ interests ahead of their own. Looser rules, now in effect, only require them to recommend investments that generally fit clients’ needs and tolerance for risk. Investment advisers are already bound by the fiduciary rule.

Proponents of the fiduciary rule say investors are vulnerable because brokers often receive compensation from mutual funds and other companies in return for selling their products. White House economists have said investors lose as much as $17 billion a year by putting money into inferior products recommended by self-serving brokers. “The SEC holds itself out as the agency that serves to protect investors, but their actions have been stunningly absent,” says Lynn Turner, a former SEC chief accountant who supports the stepped-up standard.

The financial-services industry is trying to use the lack of agreement to derail the Labor Department’s proposal. Business groups and many Republican lawmakers argue that the SEC, with decades of experience overseeing brokers, should be first to develop new regulations. The Labor Department’s rules would create confusion, they say, and restrict brokers’ ability to work with small investors. “This is squarely in the SEC’s jurisdiction, and obviously we think the agency should be actively engaged,” says Francis Creighton, chief lobbyist for the Financial Services Roundtable. “If the SEC saw a problem with how investment advice is given, I’m sure they would act on it.”

The Labor Department has spent five years trying to devise a fiduciary rule. After its first version stalled in 2011 under industry opposition and bipartisan criticism, Labor revamped the proposal. Although details haven’t been released, President Obama endorsed the plan in February at an event hosted by AARP. The department is set to issue the proposal for public comment in the next few months. Jason Surbey, a Labor Department spokesman, says the proposal has been developed with the SEC’s help.

The administration’s decision to move ahead leaves SEC Chair Mary Jo White balancing conflicting demands from fellow commissioners, industry executives, consumer groups, and lawmakers. Late last year the agency’s staff presented White with options for new rules, including requirements holding brokers to the same fiduciary standard as investment advisers, according to two people who asked not to be named because the deliberations are private. Another possibility, the SEC’s staff told White, would be to require brokers to disclose their conflicts of interest as investment advisers do now.

The staff also advised White that a strict rule would be opposed by Wall Street, the people say. White says the SEC and the Labor Department aren’t moving jointly because they have different responsibilities and legal authorities: Labor answers to the White House; the SEC is an independent agency. Any SEC rules have to “respect those differences,” she says. White doesn’t feel pressure to speed up: “We’re very focused on our own decision whether to proceed.” She may disclose her decision later this month, according to two people familiar with her thinking.

The SEC’s two Republicans, Daniel Gallagher and Michael Piwowar, oppose the effort. “There is no time and no proven need to pursue a fiduciary-duty rulemaking, unless of course we are focused more on appeasing the White House than on being an independent agency,” Gallagher says.

Commissioner Luis Aguilar, a Democrat who supports issuing fiduciary requirements as soon as possible, says he hasn’t seen “any tangible movement” and isn’t convinced the SEC will advance its own plan.

White has sharpened her understanding of the points that divide investors and the brokerage industry, says Barbara Roper, director for investor protection at the Consumer Federation of America, who met with her in early February. “It signals to me that even with a very full agenda of issues, she’s been giving attention to it,” says Roper. “And that’s a good thing.”

The bottom line: The financial industry is resisting attempts to require brokers to put clients’ interests ahead of their own.


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