SEC must make its study work in the real world

The devil, as the old saying goes, is in the details

The devil, as the old saying goes, is in the details. This certainly holds true for the SEC study calling for the creation of a uniform fiduciary standard of care for brokers and registered investment advisers.

The highly anticipated study, which was made public Jan. 22, makes clear that investors deserve to be “protected uniformly when receiving personalized investment advice or recommendations, regardless of whether they choose to work with an investment adviser or a broker-dealer.”

While all that sounds great, our concern is that the study’s authors — Securities and Exchange Commission staff members — left too many details of the regulation that would codify the standard to the SEC’s commissioners. The authors also evidently believe in the need to harmonize many of the rules and regulations governing brokers and investment advisers, but offered little more than a pointed finger in the way of direction.

Consequently, we fear that pride and politics will trump wit and wisdom along the road to rulemaking and that in the end, everyone, particularly investors, will be worse off than they are today.

“There’s room for mischief in some of the language [of the report],” Blaine F. Aikin, chief executive of Fiduciary360 LP, said in a story that appeared on InvestmentNews.com last week.

Talk about an understatement.

Consider this: The report leaves it largely up to the commission to define and/or interpret what constitutes “personalized investment advice” that would be subject to the standard. This decision sets the stage for intense battling within the SEC’s ranks and for forceful lobbying from outside groups.

It certainly doesn’t bode well that Kathleen Casey and Troy Paredes, the two Republicans on the commission, already have come out against the report’s findings.

“The study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other, and therefore, the study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection.”

While that sounds like a reasonable assessment, the two went on to make the specious argument that it is unclear whether investors are, in fact, actually being harmed by any confusion about the differences between a broker-dealer and an investment adviser, and the duties owed by each.

Moreover, they said the study does not address whether a uniform standard would eliminate that confusion.

Really?

They obviously need to do their homework. A 2010 report sponsored by a coalition of consumer and financial industry trade groups concluded that 60% of investors already operate under the false notion that their brokers and insurance agents are putting investors’ interests first.

Another aspect of the report that leaves plenty of room for mischief is its call for harmonization of regulations. Specifically, the study points to several areas where harmonization may be useful, including advertising, the licensing and registration of firms, and record-keeping requirements.

“Such harmonization should take into account the best element of each regime and provide meaningful investor protection,” the SEC study said.

Unfortunately, the study’s authors often stop short of recommending specific steps to achieve harmonization. So it will be up to the commissioners to determine what constitutes the “best elements” of the two regulatory schemes.

Done right, perfect harmonization would undoubtedly lead to greater investor protection and a more sensible, logical and cost-effective regulatory scheme governing the two groups.

We’re not sure such harmonization is achievable — especially when such broker-friendly groups as the Financial Industry Regulatory Authority Inc. and the Securities Industry and Financial Markets Association are ready, willing and able to outspend such adviser-oriented groups as the Financial Planning Association and the Certified Financial Planner Board of Standards Inc. to see that harmonization leans more heavily in their favor.

For what it is — a first pass on solving a complicated problem — the SEC’s fiduciary report is commendable. Now it is up to the commissioners to transform the lofty goals defined by the SEC staff members into reality.