Devising and implementing a uniform standard of care is not the only way to dispel any confusion broker-dealers and investment advisors and their clients may be experiencing, SEC Commissioner Michael Piwowar said at the second annual NAPA DC Fly-In Forum on Sept. 30.
Instead, he suggested that the SEC could consider drafting a concise disclosure document for broker-dealers and investment advisors. The disclosure would require RIAs and broker dealers to identify which standard of care they are operating under in the IRA rollover context, and would be in lieu of a uniform fiduciary standard.
Another advantage of such an approach, Piwowar noted, is that it would provide an opportunity to seek investor input, which he called “the best and most sensible way to solve the investor confusion issue.”
Articulating his own views and not those of the SEC or his fellow commissioners, Piwowar said he had “not yet reached a conclusion on whether or what new obligations should be imposed on financial services professionals.” Nonetheless, he called determining the appropriate standard of care for those who provide investment advice to retail investors “really, really, really hard — with three ‘reallys.’”
Broker-dealers and RIAs are subject to different regulations, Piwowar noted, but the demarcation between them has blurred since the late 1990s. As a result, he said, there has been a call for a uniform fiduciary duty guaranteeing a recipient of investment advice the same standard of care, regardless of whether the advice came from a broker-dealer or an investment advisor.
But confusion may not be sufficient reason for the imposition of a uniform standard, Piwowar indicated. He questioned whether it was even necessary, noting that the regulatory regimes governing broker-dealers and investment advisors already require both to adhere to high standards of conduct, act in their clients’ interest and avoid conflicts of interest. Not only that, there are other discrete administrative and regulatory rules for each that a uniform standard of care would not address.
Piwowar went even further, suggesting that the current regulation of broker-dealers and investment advisors is not wholly ineffective. “The two regimes right now allow diversity,” he told NAPA Net, adding, “No one has said the current system is harming customers in any way.”
In fact, a uniform standard could be even worse that any confusion that exists, he noted.
“We need to recognize that a uniform fiduciary duty actually could harm retail investors,” said Piwowar. He added that the possibility that a uniform standard could restrict middle class and minorities’ access to professional advice by making it too expensive for them to afford is a bipartisan concern on Capitol Hill — and that he shares their concerns. Adoption of a uniform standard, therefore, could have an unintended consequence. “You can get less advice or no advice,” he warned.
Piwowar’s perspective on the likely adverse effects of a uniform standard is close aligned with the views NAPA expressed in its July 2013 comment letter to the SEC on the uniform fiduciary standard.
Piwowar also noted that Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them for providing personalized investment advice and recommendations about securities to retail customers be evaluated. Accordingly, the SEC staff in January 2011 issued a study on investment advisors and broker-dealers in which it recommended that the commission “exercise its rulemaking authority to adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers.”
But Piwowar is not satisfied with that. “I view 913 as requiring more before engaging in rulemaking,” he told NAPA Net, adding it would be useful for the SEC to ask itself, “What can we do on the disclosure and education side?”
And the timing of anything the SEC does is not wedded to the DOL’s work on the definition of fiduciary, Piwowar said. “We should not act just to respond to the potential or eventual actions of another body,” he remarked, saying that the SEC is independent agency and “should act only when we have all the information we need and when doing so will promote our mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”
Piwowar cautions against actions intended largely for political consumption and acting without careful consideration of the consequences. “Bad ideas are like zombies — they don’t die,” he warned.
