Dodd-Frank Hearing: Don’t We B/Ds Have Enough Regulation to Worry About?

Dodd-Frank Hearing: Don’t We B/Ds Have Enough Regulation to Worry About?

Red_TapeThe independent broker/dealer industry has enough to worry about these days—margin squeezes, problematic alternative investments, stricter capital requirements, increased regulatory burdens… That was the message of several groups representing broker/dealers and their advisors today during a House Financial Services Subcommittee on Capital Markets hearing on implementing the Dodd-Frank Act: that a uniform fiduciary standard would place unnecessary regulatory burdens on these already-strapped firms.

Bill Dwyer, chairman of the Financial Services Institute and the face of IBD giant LPL Financial, said he supports a uniform fiduciary standard but not the one that applies the Investment Advisers Act fiduciary duty to broker/dealers. FSI supports a fiduciary standard that includes RIA- and B/D-specific requirements.

The ‘40 Act’s fiduciary duty standard has been developed through decades of investment adviser fact-specific case law. Thus, applying the ‘40 Act’s standard of care to the unique clientele, services and cost structure of the independent broker-dealer industry would force these providers to guess as to their specific obligations. This would lead to an unacceptable level of regulatory uncertainty for these firms, significant additional costs, and a resulting loss of access to services and support for small investors.

Dwyer also said that any uniform fiduciary standard should not put any business model or investor segment at a disadvantage, and therefore its implementation must include three essential elements:

  1. “Clearly articulated rules of conduct,” so independent advisors and b/ds know their specific obligations to their clients.
  2. “Clear SEC guidance on the form and content of client disclosures,” which should be in plain English, consolidated where possible and appropriate to the level of investor involvement, and tested by investor focus groups.
  3. “Effective regulatory supervision”—aka an SRO for investment advisers (which was also highly debated at the hearing—see Kristen French’s story).

Terry Headley, president of the National Association of Insurance and Financial Advisors, echoed Dwyer’s sentiments that any fiduciary standard should recognize the differences between b/ds and RIAs, “or else risk adverse, unintended consequences–namely, limiting the products and services available to middle-market investors,” which make up a significant portion of NAIFA members’ clientele. Headley didn’t go so far as to say NAIFA members have enough compliance burdens to deal with, but he did stress that the increased costs could lead firms to cut back on the number of middle-market clients they serve:

Because broker-dealers would be forced to adjust their operations and compliance programs to an additional regulatory framework, fewer clients would ultimately receive professional service and advice. As compliance costs and the potential for liability increases, it would become economically unfeasible for financial professionals to work with less affluent clients.

If costs were to go up 15 percent, 65 percent of NAIFA members said they would need to take actions that would limit their clients’ access to financial advice, according to a survey of members. If this isn’t a clear signal that a uniform fiduciary standard would place unwanted regulatory burdens on NAIFA members, I don’t know what is.

But concerns over increased regulatory burdens didn’t stop there. In fact, Ken Ehinger, CEO of M Holdings Securities, who testified on behalf of the Association of Advanced Life Underwriting, said their members—those who sell variable life insurance products— have an even higher degree of regulatory burden than do those who sell other securities products. According to him, these products are regulated by the SEC, FINRA and state insurance commissions. They are also subject to supervision by their b/d as well as the issuing insurance company. He said:

The cost of meeting all regulatory and compliance obligations is already significant for all brokers, but especially insurance producers, due to levels of oversight and requirements that already exist.

That said, we don't really know what the impact of a fiduciary standard would be or how to prepare for it. It might not even be that bad. In a worst case scenario, costs can trickle down to the end client...

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