Nov 26 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 Dec. 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.
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
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.