As efforts to apply stricter fiduciary and disclosure requirements on broker-dealers slow, the Institute for the Fiduciary Standard, a one-year-old think tank that advocates for uniformity, met with the Chairman of the SEC, Mary Schapiro, to make its case.
Despite a push by some industry heavyweights, including Shapiro, to include these requirements as part of Dodd-Frank, the larger regulatory reform mandate, the rule remains optional and may not go into effect. In the meantime, the president and founder of IFS, Knut Rostad, who is also a regulatory and compliance officer at RIA Rembert Pendleton Jackson, is hoping that the lull will give advocates a chance to build their campaign and garner support.
"I think it was important for the chairman and other stakeholders to see the support of these individuals at this time as the rulemaking seems to be stalled," Rostad said. "There's a bit of a pause in the activity, and there's a chance to add some pieces or parts to the overall picture knowing in the short term that we may not have any action at al."
At the meeting, the IFS submitted a formal letter, which was backed by signatures from 12 big names in the industry including John Bogle, Paul Volcker and Arthur Levitt. In the letter, the Institute calls for Congress, the SEC, and the Department of Labor to extend six primary fiduciary duties to broker-dealers, which include: serving the client's best interest, acting in utmost good faith, acting prudently - with the care, skill and judgment of a professional, avoiding conflicts of interest, disclosing all material facts and controlling investment expenses.
The group argues that these measures are crucial to protect customers.
"The overall consequence is that investors who do not get advice from someone who's required to put their interest first run the risk of getting advice that is too costly or bad advice that results in inappropriate and lower quality investments," Rostad explained.
While he could not provide specific details of the SEC's response because of it was a private meeting, Rostad did say that the meeting, which lasted more than an hour, ran over a bit, and "it was a good meeting."
"I think we were very satisfied to hear her talk about how she saw the last three years on this issue and the general efforts she has made," he added.
Schapiro has already voiced her support of the measure. In an emailed response to a request for comment, SEC spokesman John Nester said that "Chairman Schapiro has been a longtime supporter of the fiduciary duty rule and successfully advocated for the issue to be a part of the Dodd-Frank legislation. She continues to believe that the duty should be no less stringent than the 1940 Act standard and she continues to push the issue forward within the agency."
The uniform standard, however, faces a list of challenges. Rostad says that one motif that came back up today was the SEC's lack of additional resources.
"We all felt the sense that she has worked very hard on this and would like to make it a go. But as she has expressed in other reports, it's about bandwidth," Rostad said. "Look at what's required from Dodd-Frank in terms of additional workload. Look at the budget increases - they've got some supplemental budget increases, but not much. On some basic level, it's pure resources."
In addition, the rule faces opposition from several members in Congress, such as Rep. Spencer Bachus (R-Ala.) who wrote last year that "Any SEC action on standard of care matters is premature in the Commission can demonstrate that investors are being harmed by the current regulatory standards and that harmonization would enhance investor protection." Many in the financial services industry and two members of the SEC have officially come out against it as well, according to Rostad.
"There are many in the industry who are not really supportive of it and that has absolutely been a factor," he said. "I think in the short term it is a relatively small number of individuals and stakeholders who are engaged in this and many of them are not going to change their position. It's just a matter of making the strongest case you can to those who are in a position of power."