WASHINGTON-Oct 23 (Reuters) - A plan that could ultimately require certain securities brokers to act in their client’s best interests should not proceed unless an economic analysis demonstrates it is necessary, a top U.S. securities industry regulator said Tuesday.
“I’m far from sure about” whether such an analysis would lead to that conclusion, said Daniel Gallagher, a commissioner with the U.S. Securities and Exchange Commission, in remarks on Tuesday.
The SEC, for more than two years, has been mulling a controversial plan that would require securities brokers who give personalized investment advice to recommend only securities that are in their client’s best interests. That would mean brokers acting as “fiduciaries.” Right now brokers need only recommend “suitable” securities for their clients, based on standards such as risk tolerance and age.
But investor advocates say those recommendations are not always the best for investors. Among the reasons: the recommended investments may cost more than other products with similar performance because the broker and brokerage benefit financially from selling one thing over another.
That’s partly because they receive commissions, and sometimes other fees, for pushing products.
Investment advisers who register with the SEC - a different type of financial adviser than securities brokers - already act as fiduciaries. What’s more, they generally charge a flat fee for advice, based on a percentage of the client’s assets. That typically eliminates financial incentives to recommend certain securities.
A 2010 SEC study, prompted by the Dodd-Frank financial reform law, 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.
If harmonizing the different standards for brokers and investment advisers, however, does not resolve that confusion, “we shouldn’t be doing it at all,” said Gallagher, speaking at an annual meeting of the National Society of Compliance Professionals in Washington.
Gallagher, a Republican commissioner sworn into the role last November, also noted that Congress, in Dodd-Frank, gave the SEC power to address the problem, but did not require it do so.
The SEC has yet to propose a rule that would harmonize standards. While the securities industry says it supports doing so, it wants a new federal fiduciary standard that would accommodate certain business practices, such as selling securities branded with a brokerage’s name. Brokers are typically paid higher commissions and firms typically make more when they sell branded products.
The securities industry has also been pushing for the SEC to engage in a deeper analysis of the costs and benefits of its proposed rules, and the agency has been ramping up its focus on the issue. The industry’s concerns, however, are not a factor in the agency’s position, Gallagher told Reuters in an interview. “This has nothing to do with industry pressure,” Gallagher said.
“Without going out and getting a lot more information on the economic aspects of our decisions, I don’t think we can even put a proposal together,” he said.
Gallagher acknowledged that costs to the industry are generally easier to quantify than benefits to investors and the markets. But that does not mean the industry has an advantage, he said. “I don’t believe that everyone believes you have to quantify everything, he said.
For example, a rule adopted by the SEC in June that would bolster the agency’s surveillance of the equities markets offers benefits such as confidence in the markets and investor protection, Gallagher said. “No one said you had to meet or exceed the costs there,” he told Reuters.
Gallagher also raised concerns about the future of securities industry self-regulatory organizations.
He questioned the role of the Financial Industry Regulatory Authority (FINRA), the brokerage industry’s private regulator, for “its drive” to gain authority over registered investment advisers, who presently register with the SEC. It was at least the second time he spoke publicly about the issue in recent weeks. The SEC presently oversees investment advisers, but lacks the manpower to regularly examine their businesses for compliance with industry rules.
“I think it calls for question about what that entity would look like,” Gallagher told the audience, adding that he would like to see the creation of competing self-regulatory organizations. That’s what keeps market in check,” he said.
A FINRA spokeswoman pointed to a bill debated by U.S. House lawmakers earlier this year that contemplated multiple self-regulatory organizations.
“The critical issue here is that there is no meaningful oversight or examination of investment advisers. It continues to be a major gap in investor protection that needs to be closed,” she said in a statement.