February 22, 2010
Reform sliding backwards?
A recent Bloomberg.com item noted that lobbyists were targeting the proposal to align rules for 'brokers' and 'investment advisers' through the creation of one, fiduciary standard of care. In addition to emphasizing the danger of stalled regulatory reform, the Bloomberg item focuses attention on a topic that has bypassed surreal on its way to sublime.
As background, the '34 Act spoke to broker-dealers and their agents; six years later, one of the legislative additions of 1940 addressed 'investment advisers,' who would be held to the higher, fiduciary-like duty towards customers. For decades, the two regimes coexisted based upon distinctions between method of compensation (i.e., trade commissions defined brokers; advisory fees indicated investment advisers).
The famed "Tully Commission" of 1995 concluded, among other things, that "conflicts of interest persist" despite the compensation divide, and that some fee-based programs would serve the interests of broker-dealers. In 1999, the SEC thus proposed to allow brokers to offer some services for a fee without coming under the adviser regulatory scheme. In the related 2005 Final Rule, the SEC took the position that brokers could remain outside of the 1940 Act as long as they provided only "incidental" advice to customers and avoided more robust "financial planning services."
In 2007, a suit by the Financial Planners Association led to the D.C. Court of Appeals striking down the SEC's distinctions. Wall Street lobbied for and received "interim" rulemaking from the SEC so that millions of broker-dealer accounts needn't be re-classified (and thousands of brokers dual-registered). The interim SEC guidance provided that brokers could escape the demands of the '40 Act by avoiding "special compensation" and distinguishing broker-dealer and investment advisory activities; facing uncertainty and pressure from State regulators, some broker-dealers simply registered their sales force as both brokers and investment advisers.
An ensuing 2008 Rand Corporation study concluded (not surprisingly) that investors were confused as to whether they were dealing with a broker or an adviser.
In 2008 and 2009, successive Treasury reform plans called for the "harmonization" of the broker-dealer and investment adviser standards.
That harmonization has languished in Congress, thus empowering lobbyists in 2010 to call for a return to the bifurcated world of 1999. In normal times, this would be the point where Bugs Bunny holds up that sign to the 4th wall reading "SILLY, ISN'T IT?" But with unprecedented investor losses, class action litigation, and overall low marks for Wall Street blooming since October 2008, the cry to perpetuate the confusion by excepting brokers from a higher standard of care just seems appalling. The D.C. Court of Appeals, State regulators, a Republican administration, and a Democratic administration have all indicated the need for a solitary standard. If Wall Street truly seeks to regain the trust of Main Street, a good first step would be in publicly confessing that the time for distinctions without difference has passed.
February 22, 2010 | Permalink