[This story previously appeared in Securities Regulation Daily.]
By Jacquelyn Lumb
In remarks to the National Association of Plan Advisors, SEC Commissioner Michael Piwowar talked about the appropriate standard of care for those who provide investment advice to retail investors. Piwowar said he has not reached a decision on this matter, but the SEC must do a cost-benefit analysis before acting. He suggested a potential fix to the issue and made clear his opposition to linking the SEC’s action to the Department of Labor’s. The SEC is an independent agency and should act only when it has the necessary information to promote its mission of protecting investors, maintaining fair and orderly markets, and facilitating capital formation, he advised.
Piwowar traced the history of initiative to address the disparate standards for broker-dealers and investment advisers, culminating in a staff study and a recommendation to adopt a uniform fiduciary standard of conduct when provide personalized investment advice to retail customers. He said the rigor of the study could be called into question, but there is no doubt that retail investors do not understand the differences between the duties of broker-dealers and those of investment advisers.
Costs and benefits. In considering whether a regulatory change is necessary, Piwowar said the SEC must take into consideration the marginal benefits and the marginal costs. The SEC took an important step, in his view, when it sought data about various approaches to the standard of care issue in 2013. The SEC received many comments that it will assess as it determines whether to proceed with rulemaking.
Piwowar noted that he is not aware of any evidence that retail investors are being harmed or disadvantaged under one regulatory regime compared to the other. He added that a uniform standard may not even result in different investment advice from what clients receive today. The adoption of a uniform standard still may not clear up investor confusion given the differences in advertising rules, supervisory requirements, licensing and registration, and books and records requirements, according to Piwowar.
Given these differences, the staff also recommended that the SEC consider harmonizing the regulatory requirements of broker-dealers and investment advisers when they perform the same or similar functions. In Piwowar’s view, this topic should be part of the debate or the cost-benefit analysis will be incomplete.
Real-world example. Piwowar expressed concerns about the potential cost to retail investors that may result from a uniform standard. He said a real-world example is occurring in the U.K. following its introduction of a retail distribution review (RDR), which bans advisers from taking a commission for selling products and requires that all fees that are paid only by clients must be agreed upon in advance. Before the RDR, advisers did not charge for advice, but earned commissions from asset managers for selling their products. The resulting “advice gap” was much worse than predicted, Piwowar said, with many now reporting that the services offered by financial advisers are too expensive and opting to manage their own portfolios.
Based on the data available to date, Piwowar said the potential benefits of a fiduciary standard seem elusive while the potential costs may be very high. The SEC must take a measured and deliberate approach to his issue, he advised.
Potential fix. Piwowar believes the SEC’s disclosure requirements may play a role in the problem. He suggested that the SEC consider developing a disclosure document for broker-dealers and investment advisers based on testing various formats and their effect on investor comprehension. He said the options may include a summary disclosure document similar to the mutual fund summary prospectus, a disclosure statement for retail investors at the start of a business relationship as described in FINRA’s 2010 concept proposal, or similar to the table of information included in the Truth in Lending disclosure requirements for credit card applications and solicitations.
As for those who believe the SEC should act on a uniform fiduciary standard before the DOL reproposes its definition of fiduciary, or at least adopt a uniform fiduciary duty standard after the DOL does, Piwowar said his position is a firm no. The SEC must fully understand the issue and the possible costs and benefits before it acts, he advised.