In a letter to SEC Chair Mary Schapiro, House Financial Services Committee Chair Spencer Bachus (R-ALA) said that any SEC action to implement Section 913 of Dodd-Frank on a uniform fiduciary duty for brokers and advisers is premature until the Commission can demonstrate that investors are being harmed by the current regulatory standard of care and that harmonization would enhance investor protection. Should the SEC decide to issue a proposal implementing Section 913, despite no statutory deadline to do so, cautioned Chairman Bachus, the Commission must act carefully and comprehensively to avoid disrupting an investors’s chosen relationship with his or her investment professional. Moreover, he expects that if the SEC acts to implement Section 913 the agency should not impose in any formulation the Investment Advisers Act standard of care on brokers.
More broadly, the oversight chair said that the SEC’s primary focus should be the completion of the mandatory Dodd-Frank rulemakings. He noted that the SEC apparently plans to push forward by recalling examiners and reassigning them to write optional rules at a time when the Commission has yet to provide Congress with empirical data and economic analysis to justify these rulemakings. The Dodd-Frank Act authorizes, but does not require, the SEC to adopt rules applying the same standard of care to brokers as to investment advisers.
Section 913 of the Dodd-Frank Act, in addition to requiring the SEC to study the effectiveness of existing regulatory standards of care for brokers and investment advisers when providing personalized investment advice about securities to retail customers, also authorized the SEC to adopt rules providing for a uniform standard of care for all brokers and investment advisers. Based on the study, 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).
While the study recommended the adoption of a uniform fiduciary duty standard, noted Chairman Bachus, the SEC has failed to answer the fundamental question of whether it is necessary or even appropriate to change the standard of care for brokers. He fully supports the comments of Commissioners Casey and Paredes that the SEC staff study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and that, therefore, the study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection. Parenthetically, Chairman Bachus noted that the lack of a harmonized standard of care neither caused nor contributed to the financial crisis.