Schapiro's exit leaves broker fiduciary plan up in air

Mon Nov 26, 2012 5:28pm EST

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(Reuters) - Mary Schapiro's exit from the U.S. Securities and Exchange Commission means more uncertainty for Wall Street about a key reform that she championed: requiring securities brokers who give advice to clients to act in their clients' best interests.

The SEC's chairman has long made clear her support to require brokers to follow higher ethical guidelines with clients, known as a fiduciary standard. But Schapiro, appointed to head the agency in 2009, will likely leave with the proposal where it stands: stalled. Schapiro announced on Monday that she would step down from the agency on December 14.

"I have no doubt that Chairman Schapiro was quite sincere that she hoped to achieve this as one of the hallmarks of her tenure," said Barbara Roper, the director of investor protection for the Consumer Federation of America, an advocacy group that supports the measure.

At issue are the varied rules that apply to different types of financial advisers. Financial advisers who register with the SEC must act as fiduciaries, or in their clients' best interests. But brokerage firm advisers, who register with the industry's private regulator, the Financial Industry Regulatory Authority, only have to suggest investments that are "suitable," based on factors such as a client's age and risk tolerance.

Brokers may earn more from some investment options they pitch to clients, something investor advocates say could motivate a broker to push a more lucrative product. Flat fees that investment advisers charge, along with the different rules they must follow, are more likely to prevent potential conflicts of interest, say investor advocates.

Schapiro has tried to change that, with no success.

In 2009, she raised concerns about potential conflicts of interest driven by certain broker compensation practices in a public letter to brokerage firm chief executives.

"Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given," she wrote. That could motivate brokers to sell unsuitable securities or make unnecessary trades to earn commissions.

But the discussion quickly died. While it is unclear why, the episode was a harbinger of Schapiro's ultimately unsuccessful efforts to push the proposal through. A study by the agency followed. The industry then complained about how a widespread fiduciary standard could affect their business practices. Meanwhile, the agency struggled with a wave of other rule proposals required by the Dodd-Frank financial reform law. Then, the presidential election cycle further delayed progress on the effort.

While the securities industry says it supports a change, it has been pushing for a standard that would accommodate certain business practices, such as selling securities branded with a brokerage's name. Typically, brokers are paid higher commissions and firms make more money by selling branded products.

Changing leadership at the agency could delay commission votes about major reforms, including the fiduciary proposal, until at least mid-2013, said a former SEC official who spoke on the condition of anonymity because of political sensitivities surrounding the issue.

There were already signs of delays, prior to Schapiro's announcement. Agency officials planned to request public comment about potential costs and benefits of a fiduciary rule in mid-2012. That request is "not currently scheduled," an SEC spokesman confirmed on Monday.

NO WORRIES

While investor advocates may be worried about the fiduciary plan, the securities industry - which can enjoy the status quo for a while longer - is not.

President Barack Obama's appointment of SEC Commissioner Elisse Walter to serve as chairman-designate - a role she can potentially hold through 2013 - is not likely change the course of the proposal, at least for the short term.

"We are at the point in regulation where details matter," said John Taft, head of RBC Wealth Management in the United States, a Royal Bank of Canada unit.

It is still not clear whether Obama will nominate Walter to serve permanently as chairman. Nonetheless, Walter, a former FINRA executive and official at both the Commodities Futures Trading Commission and SEC, could be an ideal choice to pick up where Schapiro leaves off.

What's more, the fiduciary proposal and other reforms are likely "part of the Obama administration's agenda," said Ken Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association (SIFMA), a trade group. "Presumably, whoever they choose, their views will be consistent with those views," he said.

Opponents of a fiduciary standard for brokers made their presence known before Schapiro was appointed to the SEC. One draft of legislation that would later become the Dodd-Frank financial reform law included a provision that would have imposed such a standard on brokers. That idea was dropped after a lobbying push by financial advisers who also sell insurance.

The law only required the SEC to study issues stemming from the different regulations for advisers - allowing, but not requiring, the agency to make changes.

A 2010 SEC study, prompted by Dodd-Frank, recommended that brokers and advisers both be required to act in their clients' best interests. The study also concluded that many investors are confused about the differences between the two types of advisers.

Schapiro publicly declared her support for a fiduciary standard once again in October at SIFMA's annual meeting. She hoped to unveil the proposal in 2013, she said.

(Reporting by Suzanne Barlyn in New York; editing by Jennifer Merritt and Matthew Lewis)

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