Turn Up the Heat

Turn Up the Heat

Amid the summer doldrums, heavyweights are turning up the heat on major regulatory issues facing the advisor industry. But will they get the attention of the regulators?

Summer is usually a time when the markets are quiet, many people go on vacation, and regulators adjourn for summer recess. But several people, including some high-profile names, have been making noise on pending regulatory issues facing the financial services industry—namely the fiduciary standard and the self-regulatory organization bill. But some sources say their efforts won’t make much of a difference with the regulators. 

First, in early August, U.S. House of Representatives Financial Services Committee Chairman Spencer Bachus (R., Ala.) revived the conversation around advisor oversight and the need for an SRO in a Wall Street Journal op-ed. But Bachus announced he would table his SRO bill in July, so the op-ed came as a surprise to industry stakeholders.

Most recently, 12 industry heavyweights have signed a “fiduciary declaration,” which urges Congress, the SEC, and the U.S. Department of Labor to extend a fiduciary standard to those who give investment advice. The declaration is part of a larger initiative of the Institute for the Fiduciary Standard called “Fiduciary September,” which will include a webinar for reporters, a meeting with SEC Chairman Mary Schapiro, the release of a white paper discussing six fiduciary duties outlined in the declaration, and a fiduciary forum.

The signatories, which were assembled by Knut Rostad, president of the Institute for the Fiduciary Standard, include Sheila Bair, former chairman of the FDIC; Princeton Economist Alan Blinder; Vanguard founder John Bogle; Peter Fitzgerald, former U.S. senator from Illinois; Tamar Frankel, a professor of fiduciary law at Boston University School of Law; Andrew Golden, president of the Princeton University Investment Company; Roger Ibbotson, professor of finance at Yale; Arthur Levitt, former chairman of the SEC; Daniel Kahneman, a Princeton psychology professor and Nobel laureate; economist and writer Burton Malkiel; David Swensen, CIO of Yale’s endowment; and Paul Volcker, former chairman of the Federal Reserve. 

“What I would hope is that through the collective voice of these 12 individuals and how the specific discussions go, that there may be a possibility that the regulators could look at this differently and could possibly see that there may be a greater reason to push harder to get the regulation through,” Rostad says.

Status of Fiduciary

But the fiduciary standard has also been tabled for the time being. The DOL has been getting pushback from Democratic congressmen regarding its efforts to tighten up the definition of fiduciary under ERISA rules. Phyllis Borzi, who’s heading the initiative at the DOL, says a final rule will not be issued by the end of the year.

The SEC’s fiduciary standard is also up in the air, as the agency works on conducting a cost-benefit analysis. The next step would be to solicit more information before proposing a rule, and once a rule is proposed, it can take 60 to 90 days to get public comment. And at present, the SEC doesn’t have the support of three of the five commissioners it needs to push a proposal through.

That said, summer may be the perfect time to bring attention to these issues, when things have slowed down.

“Without all of the noise that has been around this a few months ago, it may be a terrific time because it may be an opportunity to get attention of those that may not have seen or recognized or acknowledged the information when they were just being bombarded from every side,” says Harold Evensky, the founder and principal of the Florida-based wealth management firm Evensky & Katz. “It keeps the issue a little more front-of-mind, as opposed to, ‘Oh that’s yesterday’s story; let’s not worry about it.’”

Moving the Needle

But some say Rostad’s initiative won’t tip the scale one way or another with the regulators.

“These are clearly heavyweights, and at the end of the day, it’s going to continue to remind the SEC, the Department of Labor, and Congress that there’s strong interest in moving forward,” says Duane Thompson, senior policy analyst for fiduciary consultant fi360. “I would love to say, ‘Yes, I think it’s decisive, and it’s going to motivate the agencies to move forward with the rule.’ But sadly, I don’t think that’s reality.”

“Section 913 of Dodd-Frank represented a political compromise,” says David Tittsworth, executive director and executive vice president of the Investment Adviser Association. “I think it’s extremely unlikely that Congress will revisit that provision any time in the near future.” 


Arthur Laby, a law professor at Rutgers University who specializes in securities regulation, says a uniform fiduciary standard is the next logical move by regulators, but there are still a lot of tough unanswered questions with respect to its implementation. 

“A lot of very influential people say there’s going to be a fiduciary standard. I don’t know of anyone who disagrees with that,” Laby says. “The difficulty is ironing out the details in implementing a uniform fiduciary standard.”

For example, broker/dealers and brokers can trade out of their own accounts, whereas RIAs cannot, unless they give the client prior disclosure and the client consents. It is hard to be a fiduciary at the same time that you’re transacting with someone as a principal, Laby says.

“You can’t simply eliminate the historical differences between brokers and investment advisors and the way they do business.”

SIFMA has voiced its concern over whether a fiduciary standard for brokers will be akin to the current standard for advisors, while investment advisor advocates worry that rulemaking could water down the existing fiduciary standard.

Such details and nuances have to be worked out before you can get any fiduciary rule through the SEC, DOL or Congress.

“Any rulemaking that will be pursued is going to have to deal with the specific provisions and nuances of Section 913 and will require an analysis of some very complicated provisions,” Tittsworth says. 

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