There are currently three economists working within the Division of Risk, Strategy and Financial Innovation on the topic of retail financial advice and the differences between the broker and investment adviser regulatory regimes, said SEC Chair Mary Schapiro in a Jan. 10, 2012 letter to Rep. Scott Garrett, Chair of the House Capital Markets Subcommittee. The letter was in response to Chairman Garrett’s recent questions on the progress of SEC economists in gathering and analyzing data necessary for a meaningful consideration of potential standard of conduct regulations for brokers and investment advisers providing retail investment advice.
In the letter, Chairman Schapiro also said that the SEC staff is drafting a public request for information to obtain specific data on the provision of investment advice and regulatory alternatives. She noted that, in addition to the work of the SEC economists, it is especially important to ask the public for additional data and empirical analysis.
Although SEC employees do not track their time by specific projects, the SEC Chair assured Chairman Garrett that the Risk Fin economists spend a significant amount of their time on the issues of the standard for brokers and advisers providing retail investment advice. Specifically, they have reviewed and catalogued the publicly available data, including academic articles, reports and surveys and opinion pieces discussing the market for retail financial advice. The search encompasses information describing differences between regulatory regimes based on fiduciary and suitability standards, the economics of the financial advice industry, the quality of financial services, conflicts of interest, consumer disclosure, and retail investment behavior.
In December of 2011, Risk Fin communicated a summary of the available literature to the SEC and the Risk Fin economists discussed the evidence and its relevance to potential regulation. Risk Fin economists are also conducting an ongoing dialogue with financial economists at other agencies and from academia. The SEC believes that this interaction will give Commission economists a useful and different perspective on how to conduct an economic analysis in this area.
According to Chairman Schapiro, the Risk Fin economists have also proactively reached out to industry groups and finance and law academics to ascertain the availability of data important to any future economic analysis and also to obtain additional points of view. Similarly, Risk Fin economists are working with other SEC staff to develop focus group and survey questions to obtain additional information and insights through investor testing.
In moving forward with regulatory action, the SEC will follow its usual practice of including its economic analysis for review and public comment as part of any proposal. This process has the important benefit of providing a mechanism for refining the economic analysis by seeking feedback on specific issues and making requests for private data, she said, especially in this area where the data needed to conduct an analysis may not be publicly available.
Based on its review of the broker-dealer and investment adviser industries pursuant to a study mandated by Section 913 of the Dodd-Frank Act, in 2011 the SEC staff recommended the adoption of a uniform federal fiduciary standard for brokers and advisers that would be no less stringent than the standard currently applied to investment advisers under Advisers Act Sections 206(1) and (2). The new standard would apply uniformly to both brokers and investment advisers when providing personalized investment advice about securities to retail customers
In her letter to Chairman Garrett, Chairman Schapiro noted that two Risk Fin economists were members of the interdivisional drafting team responsible for publishing the study. These economists continue to regularly meet with staff from the Division of Investment Management and the Division of Trading and Markets to collectively discuss the topic and meet with outside interest groups. Investment Management and Trading and Markets staff also contribute to the economic analysis by providing industry insights and legal analysis.
In a letter sent to Chairman Schapiro on March 17, 2011, Chairman Garrett said that, while Section 913 of Dodd-Frank Act gives the SEC the discretion to adopt a uniform fiduciary standard for brokers and investment advisers, the statute does not mandate the adoption of such a standard, and in no way suggests a congressional intent that the SEC move forward on such a rulemaking without a sufficient basis. The letter was also signed by 13 members of the Financial Services Committee.
The Garrett letter also notes that the SEC has not identified and defined clear problems that would justify a rulemaking and does not have a solid basis on which to move forward. The SEC should conduct a thorough cost benefit analysis that considers customer preferences while evaluating the specific impact that any market changes would have for investors, as well as assessing the broader practical impact that such changes might have throughout the entire financial marketplace. For example, if the SEC’s activities should involve a relationship with the Department of Labor’s incipient changes to the existing definition of fiduciary under ERISA, advised Chairman Garrett, this should factor into the SEC’s analysis and subsequent activities in order to minimize disruption to the provision of financial services to investors.