Rules for financial pros need work: SEC member
WASHINGTON (Reuters) - Rules for investment advisers and broker-dealers need to be brought more in line with each other, a member of the U.S. Securities and Exchange Commission said on Wednesday.
SEC Commissioner Kathleen Casey also told Reuters in an interview that a merger or rationalization of the roles of the SEC and Commodity Futures Trading Commission would be a valuable reform.
Merging the SEC and CFTC has often been proposed as a way to simplify the patchwork of U.S. financial regulation but previous efforts have failed, with objections coming from both lawmakers and regulators.
"I do believe that a merger or rationalization of the SEC and CFTC missions would be valuable, an important reform," said Casey.
On the broker-dealer versus advisers issue, many have said rules for different financial professionals, which date back to the early 1900s, have failed to keep pace with the complexity of today's financial industry.
Casey, a Republican who will be in the minority on the five-member commission under the new Obama administration, told Reuters she strongly believed that the rules should be "harmonized."
Many investors do not understand the difference between investment advisers, who give out financial advice, and broker-dealers, who carry out investment transactions, a SEC commissioned study found.
Currently, some broker-dealers give investment advice, but do not fall under the 1940 law that governs investment advisers because it is only a small part of their business.
That fine distinction has come under scrutiny due to Bernard Madoff's alleged $50 billion fraud. For years, Madoff ran a broker dealer business that was registered with the SEC and subjected to broker-dealer rules. Madoff only later registered as an investment adviser, which requires fiduciary duties and stricter disclosures of potential conflicts of interest.
ADVISER OVERSIGHT
Casey did not comment on Madoff specifically, but said the idea of creating a self regulatory organization (SRO) for investment advisers was appealing.
"In light of the size and growth of investment advisory business and the overlap in many cases there, an SRO could serve as an important enhancement to the SEC's ability to police the markets," Casey told Reuters on the sidelines of an Exchequer Club lunch in Washington.
The Financial Industry Regulatory Authority is an SRO that supervises nearly 5,000 U.S. brokerages and is in turn overseen by the SEC.
Key lawmakers have started looking at the rulebooks for financial professionals in wake of the Madoff scandal. It is unclear how policymakers will reshape the landscape and whether broker-dealers will have to adhere to investment-adviser rules.
"We should ensure that we maintain investor choice," said Casey. "We still want to provide flexibility to have broker-dealers and investment advisers engaging in different services that they provide to investors."
In addition to fiduciary duties and disclosure requirements, investment advisers are prohibited from buying and selling from their own accounts, whereas broker-dealers are allowed to engage in so-called principal trades.
Congress is getting ready to reform the country's regulatory structure for the financial system as the economic crisis has highlighted problems in the current set up.
Earlier, in her speech to the Exchequer Club, Casey said the SEC should act in the "near future" on proposals to toughen rules for credit rating agencies like Moody's Corp (MCO.N) and Standard & Poor's (MHP.N).
Proposals that are still before the SEC include one that would reduce investors and Wall Street's reliance on credit ratings and another would require credit agencies to disclose the history of all their ratings that were paid for by banks and other issuers.
"In my view, it is vital that 100 percent of the credit ratings are disclosed to investors and market participants," Casey said.
(Reporting by Rachelle Younglai; Editing by Andre Grenon and Tim Dobbyn)
