Fiduciary issue likely to land in SEC’s lap

Although a House Financial Services subcommittee plans to discuss adviser issues at a hearing on Oct. 6, it’s unlikely Congress will debate the fine points of adopting a fiduciary standard for all financial advisers.

Observers think that Congress will turn the fiduciary standard issue over to the Securities and Exchange Commission and focus on other pieces of financial reform legislation this fall. Advisers, of course, fear that the SEC will then pass the buck to the Financial Industry Regulatory Authority Inc., which they see as favoring broker-dealers.

Annette Nazareth, a former SEC commissioner who once ran the commission’s division of trading and markets, also thinks that Congress will eventually direct the SEC to set a new standard of care for working with retail clients, as proposed by the Obama administration. But she disagreed with those who assume the SEC will effectively adopt a diluted fiduciary standard and have it enforced by Finra for brokers and independent advisers who give investment advice.

“I think the SEC intends to a lot of fact-finding on this,” Ms. Nazareth, now a partner at Davis Polk & Wardwell, said last week at a legal and compliance conference in New York. “It’s a controversial subject.”

It is too early to discuss how the agency would implement a directive to devise and enforce a fiduciary standard, said James Eastman, chief counsel and associate director of the SEC’s Trading and Markets Division.

“Finra has a structure in place, but it really depends on the mandate the commission gets,” he said.

For its part, Finra supports a fiduciary role for broker-dealers “if that is where the SEC and Congress go,” Michael Rufina, a Finra senior vice president, said last week at the conference sponsored by the Securities Industry and Financial Markets Association. “Whatever Congress or the SEC does, Finra will be in a position to examine for it.”

And, Mr. Rufina added, “it’s only a matter of time” before brokers and advisers come together under a fiduciary standard.

David DeMuro, the former head of compliance and regulation at Lehman Brothers Holdings Inc., argued at the conference that Finra arbitration panels already hold many brokers to a fiduciary-like standard, and said that he is certain that a unified standard will be formally adopted for retail brokers and registered investment advisers.

As Congress prepares to address comprehensive financial reform, lobbyists who represent brokers, advisers and consumer groups are working furiously to buttonhole key lawmakers and the aides who typically shape legislation, to make sure that their constituencies are protected.

The securities industry already is in the trenches trying to shape broad exemptions to the fiduciary standard. For example, SIFMA is lobbying to allow firms to conduct proprietary trading at the same time that they offer investment advice to retail investors, providing the clients waive conflict-of-interest restrictions.

It will be unwieldy for brokers to get client consent for a waiver on a trade-by-trade basis, said John Polaning, a managing director and head of compliance at UBS Wealth Management.

Requiring client consent “would make it difficult to live up to your fiduciary duty,” said Mr. DeMuro, now a senior counsel at the law firm O’Melveny & Myers.

Hoping to have its voice heard, the Financial Planning Coalition — which is made up of the Certified Financial Planner Board of Standards Inc., Financial Planning Association and the National Association of Personal Financial Advisors — has retained Valente & Associates, a small Washington lobbying firm, to push for a financial planning oversight board.

The creation of such an oversight board doesn’t appear to be on the radar screen of either branch of Congress. In the House, the Financial Services Committee is set to start acting on legislation as early as mid-October, after it finishes the last round of hearings on issues such as systemic risk, the proposed consumer financial protection agency and capital market issues.

The committee, headed by Rep. Barney Frank, D-Mass., is planning to act on separate pieces of legislation with the hope that the full House would vote on the bills by the end of the year. The ranking Republican on the committee is Sen. Spencer Bachus, R-Ala., who has spoken in favor of bringing advisers under Finra.

The Senate Banking Committee, whose chairman is Sen. Christopher Dodd, D-Conn., will act after the House committee, and he has said he wants to act on one major piece of legislation, rather than a series of bills. The ranking Republican on the committee is Sen. Richard Shelby, R-Ala.

“While the fiduciary standard debate has received some coverage, there are other issues in financial services regulatory reform that are better understood,” said David Tittsworth, the executive director and executive vice president of the Investment Adviser Association, which is lobbying on the issue. “It is not a top-tier regulatory reform issue.”

E-mail Sara Hansard at [email protected] and Jed Horowitz at [email protected].