Nov 21 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
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
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
"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
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
"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
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
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
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
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)