SEC Joins Battle on Broker Bias That Could Remake Industry

SEC Joins Battle on Broker Bias That Could Remake Industry

byDave Michaels

March 17, 2015

(Bloomberg) — The head of the U.S. Securities and Exchange Commission called for tighter rules on brokers, echoing the White House’s campaign to crack down on what the government calls biased financial advice that is costing investors billions of dollars.The move brings the SEC to the forefront in a battle with Wall Street that could reshape the landscape for advisers and savers alike, touching on how brokers steer clients and collect fees, and potentially creating new winners and losers among investment funds. It’s unclear how it will play out as the agency weighs concerns from industry and investor groups.

In remarks long-awaited by the financial industry, SEC Chair Mary Jo White called Tuesday for a new regulation that would make brokers put the interests of their clients ahead of their own, a so-called fiduciary duty.

Her remarks came after the Obama administration advanced a plan through the Labor Department to impose the higher standard on brokers who manage retirement accounts. White’s plan would make all financial advisers follow the same rules.

The SEC should “implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor,” White said at a conference sponsored by the Securities Industry and Financial Markets Association in Phoenix.

The SEC, which oversees the brokerage industry as a whole, has studied the issue for years without taking any regulatory action.


White’s position could break a standoff between the two Democrat and two Republican commissioners. White said she will begin talking with other commissioners about the outlines of new rules.

Under current regulations, brokers must make “suitable” recommendations, meaning the investments have to fit the customer’s needs and tolerance for risk. Some investor groups say the current rules don’t go far enough to limit conflicts of interests for brokers, who are paid by mutual funds and other companies for selling their products.

Investment advisers, also supervised by the SEC, already are required to put their clients’ interest first. While brokers have been open to following a similar standard, they still want to be able to charge commissions instead of collecting fees based on asset size, as investment advisers do.

White called for SEC staff to develop a “principles-based standard” rooted in that of investment advisers.

‘Stand Down’

Wall Street lobbyists, who have spent more than five years fighting the Labor Department on its proposal, said White’s announcement should pave the way for the securities regulator — with broader jurisdiction and deeper knowledge of the industry – – to lead the charge on any new rules.

“The SEC is the right agency to look at this topic,” said Ira Hammerman, Sifma’s general counsel. “We have long advocated for the Department of Labor to stand down.”

White, in her remarks, declined to comment specifically on the Labor plan, which hasn’t yet been released for public review. Still, she said each agency had its own job to do.

Advocates for a tougher standard said that while they welcomed the SEC’s move, it is imperative that Labor move ahead with its own plan.

“You need both agencies to act in order to get a comprehensive solution to the problem,” said Barbara Roper, director of investor protection at the Consumer Federation of America. Financial firms’ efforts to get the SEC to take the lead “reflects their belief that they can get a weaker rule,” she added.

Political Battle

White’s support for the measures aligns her with the Obama administration and congressional Democrats. It pits her against many Republicans, who have said a fiduciary standard will be costly for brokers and could make them drop less wealthy clients.

“Getting the balance right is absolutely essential,” White said. “At the end of the day, if all we succeed in doing is depriving investors of reliable, reasonably-priced advice, we will have failed in that effort.”

Labor Secretary Tom Perez said in a speech last week that current rules enable biased financial advice that jeopardizes workers’ nest eggs. He vowed to complete the rule before President Barack Obama has left office.

Should the SEC move ahead, there’s no assurance that a final fiduciary rule could be completed during the same timeframe. The staff first needs to draft a proposed rule and then open it to several months of public comment. The agency then would likely revise the regulation before the commission would vote on its final form.

In addition, the SEC’s two Republican commissioners have already expressed opposition to a new rule, leaving White to seek agreement with the two Democrats.

Enforcing Standards

White also said today she supports third-party compliance exams of investment advisers, an idea supported by some Republicans. The SEC has struggled for years to inspect more than 10 percent of all advisers annually. It conducts exams of nearly 50 percent of all brokers every year.

The outside exams would supplement, not replace, the SEC’s own compliance efforts, she said.

“The SEC really has for years not had sufficient resources to examine investment advisers,” she said. “Having a strong fiduciary duty standard on the books is only strong if it’s complied with and it’s enforced.”

To contact the reporter on this story: Dave Michaels in Washington


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