Mary Jo White and the Investment Adviser Regulation Debate

I was tempted to shrug off this year’s invitation to SIFMA’s annual event, to be held as usual in a venue that can accommodate 1,200 securities industry stalwarts. The industry, including the Securities Industry and Financial Markets Association, puts on a number of events that have evolved into love-ins for their members — and why not? It’s their affinity and lobbying group. But after a very persuasive communications professional drew me into joining the festivities, it turned out to offer more enlightenment than I expected. That’s because before the November 10 event, I hadn’t realized that the securities industry has a powerful advocate in the person of Securities and Exchange Commission Chair Mary Jo White.

I arrived early at the Marriott Marquis in Times Square, grabbed some breakfast and took my place at one of two journo tables in the nosebleed press section at the back of the giant banquet hall. After two welcome addresses by SIFMA officers, White ascended the stage for a question-and-answer session with CNBC reporter Mary Thompson. Members of various news outlets were at the ready with laptops, notebooks and digital recorders to suck up any and all newsworthy pearls that the SEC chair might drop.

White began — not unexpectedly — by taking a tough stance on crime and the agency’s policing duties. She flexed her enforcement muscles, pointing out that “strong regulation is essential to markets working well” and justified the “broken windows” regime of stopping crimes before they escalate. “We don’t want to ignore the small technical noncompliance because it leads to larger ones,” explained White. “It delivers a strong message of deterrence.”

In her 50-minute response session, White covered a broad swath of securities agenda items, ranging from beefing up trading technology as a deterrence to cyber, terrorist and other attacks to brokerage rebates to new regulations on high frequency trading and executive compensation that are related to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Resigned to the weighty list of potential new regulations, White said, “You never get to a place where you declare ‘mission accomplished.’”

Then, just as White’s rules-and-regs session was drawing to a close, she delivered a surprise.

When asked where the SEC is going to come down on the issue of fiduciary standards, White waffled. She is seemingly uncertain as to whether it is best practice to hold broker-dealers that promote themselves as financial advisers — to unsuspecting clients who don’t know the difference between a salesperson and an adviser — to the same standards of fiduciary care as bona fide financial advisers.

For those who have missed this particular conflict, some background is in order. Over the decade that followed the Great Depression, Congress enacted two laws to govern two types of financial services professionals. The Securities Exchange Act of 1934 regulated salespeople at broker-dealer firms, whereas the Investment Advisers Act of 1940 set a higher standard of investor fiduciary care for people who impart financial advice. Decades later, with many broker-dealers offering advice on investment and retirement planning, the two roles have converged. But because salespeople are not held to the same standard of care as advisers, they can, for example, call clueless retirees and try to get them to roll their 401(k)s into an IRA account without mentioning that the fees will double and there will no longer be a plan sponsor or other fiduciary managing the retirees’ assets.

The magnitude and nature of this discrepancy were highlighted in 2013 when the U.S. Government Accountability Office published a now famous (or perhaps infamous) study, “Labor and IRS Could Improve the Rollover Process for Participants.” GAO staff posed as potential purchasers of IRA rollover accounts and made recordings of fund salespeople who denied or did not mention that there were higher fees and no regulated oversight — details that a registered adviser is required to provide.

Among the GAO’s findings: “There is concern that participants may be encouraged to choose rollovers to IRAs in lieu of options that could be more in their interests” and “that service providers’ call center representatives encourage rolling 401(k) plan savings into an IRA even with only minimal knowledge of a caller’s financial situation.” The GAO recommended that the Department of Labor and the Internal Revenue Service, both of which govern private company–sponsored retirement plans under the Employee Retirement Income Security Act (ERISA), take steps to reduce obstacles and disincentives to plan rollovers. These include plan participants receiving complete and timely information about distribution options.

Dodd-Frank gave the SEC the authority — although not a mandate — to address fiduciary duties for broker-dealers.

For its part, the Department of Labor has been trying since October 2010 to establish a conflict-of-interest rule that would expand the definition of “fiduciary” under ERISA. Phyllis Borzi, assistant secretary for the employee benefits security administration at the DoL, has spoken publicly about her desire to even the playing field between broker-dealer advice and the counsel of advisers. To get there, the DoL has scheduled its second attempt at rulemaking for January 1, 2015.

“There is big money behind the firms that don’t want to have any fiduciary standard. They try to scare companies into thinking that their costs and liabilities will go up, and they try to scare regulators by telling them that plan participants will cash out of their 401(k)s if they can’t get advice from stockbrokers,” one large corporate plan sponsor, who requested anonymity, wrote to Institutional Investor via e-mail. “This is silly, because people can just leave their money in their 401(k) plan if it’s difficult to roll over.”

So it was all the more surprising when White appeared unconvinced that salespeople should be governed by the same rules as advisers. Responding to a query on the fiduciary standard issue, White said, “Care needs to be taken to ensure we’re not harming investors by driving away service providers in the brokerage space.” That’s right: White is concerned that investors could be harmed if a new fiduciary standard for fund salespeople meant they could not sell as hard or as inappropriately as they do now.

White promised to make a decision by year-end. The financial services and investment management industry will be waiting with keen interest to learn where the SEC will come down on this issue.

Follow Frances Denmark on Twitter at @francesdenmark.

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