Court Case Helps Stall SEC Move to Increase Fiduciary Standard for Stockbrokers

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Court Case Helps Stall SEC Move to Increase Fiduciary Standard for Stockbrokers

The push to make stockbrokers adhere to same fiduciary standard as financial advisers has been held up by court and broker challenges. Consumer advocates wanting to hold stockbrokers to the same client-first standard of care as investment advisers appeared to be successful last summer after a study by the Securities and Exchange Commission called for new rules along those lines.

Stockbrokers, however, objected, saying providing advice was just one part of their business model and that they shouldn’t have the same degree of accountability for the client’s best interest in all situations. The SEC ended up not bringing the rule change to a vote, and now says it won’t issue new rules until it studies the potential cost of the rule change to the industry.

Court case prompts more review

The shift is considered mostly due to an unrelated court case from last year, where the U.S. Court of Appeals for the District of Columbia negated an SEC rule on “proxy access” that would have let shareholder groups put up their own proposals and candidates for the board of directors on proxy ballots distributed by the company. The court said the SEC hadn’t thoroughly reviewed the rule’s potential cost.

David Tittsworth, the executive director of the Investment Advisor Association, said that decision changed the atmosphere for SEC rule making. “The SEC doesn’t want to be proposing rules that will just be struck down,” he said.

In January, SEC Chairman Mary Schapiro wrote to Congress to confirm that three staff economists were studying the issue of expanding the fiduciary responsibility of stockbrokers and putting together another request for data on the market for retail financial advice.

Different standards, different compensation

SEC surveys have indicated that most investors don’t understand what fiduciary means and don’t realize brokers and investment advisers offer different levels of care. Typical investment advisers and financial planners offer year-round planning services and portfolio management and charge a percentage of assets, usually 1% or so for up to $1 million. But some also charge a straight hourly rate or a fixed fee for whatever help they provide. Brokers, meanwhile, provide not only advice, but act as agents for clients in securities transactions. They are generally paid commissions or other transaction-based fees.

Under current rules, brokers need only ensure the products they sell to clients are “suitable,” but not necessarily the best or least expensive choice possible. A broker, for instance, can sell a client a variable annuity that comes with a generous commission over a cheaper product. Advisers, on the other hand, are held to a fiduciary standard that requires them to recommend the less expensive option.

Investor advocates say new rules would be an important step forward. Harvey Goldschmid, a professor at Columbia University Law School and a former SEC commissioner, said, “It’s simply good policy, wise and fair. It will give retail customers greater protection.”

Brokers say they’re for the uniform fiduciary standard, but only if applied to personalized investment advice — not when brokers are selling products or executing trades. “The SEC should not take a statute that applies to a different business model and apply that to the broker-dealer business,” said Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association.