COMPLY-U.S. SEC may get a push toward broker reforms

Thu Nov 21, 2013 12:31pm EST

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Nov 21 (Reuters) - The U.S. Securities and Exchange Commission, which has long been weighing tough new ethical standards for securities brokers, may get a nudge on Friday, when a key advisory committee is expected to vote in favor of reform.

The hot button-issue of requiring brokers to act as fiduciaries - in clients' best interests - when giving personalized investment advice has been the subject of a long-running debate in Washington. The expected recommendation by the agency's Investor Advisory Committee may be just the push the agency needs to move such a rule forward, say regulatory experts.

The SEC committee, established by the 2010 Dodd-Frank financial reform law, is scheduled to hold a day-long meeting on Friday to consider several suggestions under study. Among them: telling the agency to proceed with a fiduciary rule for brokers.

Securities brokers presently are bound by a lower standard that requires them to recommend securities that are "suitable" for investors, based on factors such as a client's risk tolerance or age. That advice can include brokerage-branded funds that can be more expensive than alternatives and that likely wouldn't pass a tougher fiduciary test. The committee's approval is widely expected.

While Dodd-Frank does not require the SEC to follow the committee's recommendations, ignoring such a vote will not be easy for the agency, said Arthur Laby, a securities law professor at Rutgers School of Law in Camden, New Jersey. Congress mandated the committee, and that typically carries more weight than a group an agency may appoint on its own to study an issue.

"Congress will expect the SEC to take the committee's recommendations seriously, and the SEC will want to meet those expectations," Laby said.

Committee members themselves - influential academics and representatives of the public and private sectors - also have "an abundance of accumulated wisdom" that will be hard to brush off, Laby said. The 21-member committee includes its chairman, Joseph Dear, chief investment officer of the California Public Employees Retirement System, and Joseph Grundfest, a professor at Stanford Law School in California and a former SEC commissioner.

The Dodd-Frank law required the SEC to study possibly streamlining rules for brokers, who are largely overseen by Wall Street's self-funded watchdog, the Financial Industry Regulatory Authority, and for investment advisers, who are regulated by the SEC and must already act as fiduciaries. An SEC study in 2011 called for creating a uniform standard that could accommodate the different business models.

SEC Chair Mary Jo White has called the issue "a major focus of our efforts" but has not set a timetable for drafting rules. The issue was long discussed by the SEC's two previous chairs, but the agency lacked the votes to move forward. Some consumer advocates privately wonder if the measure will be a priority for White, whose past roles as a litigator and prosecutor may mean she is more focused on enforcement than regulation.

"We certainly don't have the ability to force the commission to do anything," said Barbara Roper, head of the Investor Advisory Committee subcommittee that drafted the recommendation. But a vote in favor of the recommendation sends a message that the issue is a high priority for investors, said Roper, who is also director of investor protection for the Consumer Federation of America.

OLD LAW, NEW STANDARD

Roper's subcommittee unveiled a draft of its recommendation in October. It wants the SEC to develop a fiduciary standard for brokers that is closely aligned with the federal law that investment advisers must already follow.

The Securities Industry and Financial Markets Association (SIFMA), a trade group that represents the largest U.S. retail brokerages, has said it supports a fiduciary standard for retail brokers but wants a new federal standard that leaves room to continue current industry practices, such as selling brokerage branded mutual funds.

Initially, the industry was concerned that a fiduciary requirement would preclude brokers from receiving commissions as compensation for trades they make for clients, but the Dodd-Frank law spelled out that commission payments would not violate a potential fiduciary duty for brokers.

The subcommittee's approach is more stringent than SIFMA's. It wants the SEC to develop a rule based on the 73-year-old law that investment advisers must follow. Brokers have been largely exempt from the law because their business traditionally hinged on taking clients' buy and sell orders, while giving only "incidental advice."

The SEC, however, can narrow that exemption, the subcommittee said. Under its recommended approach, brokers who choose to offer personalized investment advice to retail investors, such as retirement planning, would have to follow the same fiduciary standard that applies to investment advisers, according to the draft. Brokers who call themselves "financial advisers" would also have to follow the standard, according to the draft.

SIFMA, in a letter to the SEC dated Oct. 11, took issue with the recommendation. It wants the agency to develop a new fiduciary rule for brokers under a law that already regulates the brokerage industry.

Dodd-Frank requires the SEC to respond to the committee's recommendations.

Those recommendations are far more likely to stand out than the scores of reports and studies that the Dodd-Frank law required on other issues, said John Coffee, a professor at Columbia Law School in New York. "This is the subject of a longstanding guerrilla war," Coffee said. "It won't be ignored as much as some other reports because there are concerned advocates on both sides." (Reporting by Suzanne Barlyn; Additional reporting by Sarah N. Lynch; Editing by Linda Stern and John Wallace)

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