Has SEC Unfairly Rigged Its Fiduciary Questionnaire?
Three highly regarded industry thought leaders attacked the SEC’s recently published Fiduciary Questionnaire during a keynote presentation before 600 attendees at the fi360 Annual Conference in San Diego last week. On March 1, 2013, the SEC issued a release entitled “Duties of Brokers, Dealers, and Investment Advisers” (Release No. 34-69013; IA-3558; File No. 4-606) in an unprecedented attempt to obtain public comment prior to the release of a specific rule (in this case relating to the adoption of a Uniform Fiduciary Standard). According to the experts on the fi360 panel, this effort had #SECFAIL written all over it from the get-to.
Ron Rhoades, who is Chair of the Committee for the Fiduciary Standard (as well as Program Chair for the Financial Planning Program at Alfred State College in Western New York) says his group is “struggling” with the SEC questions. “Some of the questions are not even good,” he says. Rhoades told the audience “We’ll ask our members to write the SEC, the DOL and Congress.” He then asked fi360 CEO Blaine Aikin if his group plans a similar call-for-action prior to the SEC’s July deadline.
“Yes, fi360 will respond,” said Aikin, “but not in a way the SEC expects.”
Aikin felt the fact the SEC is asking for comments before issuing a proposed rule is a disservice. Furthermore, he suggests – whether intentionally or not – the questionnaire itself might be unfairly biased. “Many of the questions the SEC is asking are inappropriate or make assumptions contrary to the core principles of fiduciary,” says the fi360 CEO. “The SEC is asking how to accommodate the industry by compromising on two centuries of common law rules. This question is backwards. It should be ‘how do we accommodate the investor?’”
Rhoades agreed, saying it’s as if the SEC is asking “how do we constrain fiduciary” instead of the other way around.
For example, here’s a portion of one of the many questions in the SEC’s 72 page manifesto, (which reads like a final exam for a graduate level course):
In particular, describe the cost to broker-dealers and investment advisers in terms of dollars and time spent from providing these activities to retail customers under the uniform fiduciary standard and each of the alternative approaches.
Skip Schweiss, Managing Director of Advisor Advocacy & Industry Affairs at TD Ameritrade, said “It will be very, very, difficult for folks to respond directly to the questions posed by the SEC.” Schweiss thought the basic direction taken by the SEC was incorrect. “Fundamentally, this shouldn’t be about costs,” he said, “it should be about the philosophy of putting the client first.”
No doubt the theoretical nature of the SEC’s self-fulfilling questions have perplexed many commentators. Aikin says, “We’ll ask our members to respond by questioning some of the underlying questions. It’s not productive for organizations to entertain hypothetical rules that fail at the principle level.” In particular he feels the SEC’s over-reliance on quantitative data may skew the analysis away from the most important issue. “It’s tough to quantify the value of objective advice,” says Aikin. “We routinely underemphasize hard to quantity benefits and overemphasize easy to quantify costs. But the fundamental question remains ‘what is the price of your principles?’ In either case, one should always quantify the costs and benefits from the investor’s perspective, not the industry’s.”
Schweiss summed up the feelings of many fi360 Annual Conference attendees when he offered this conclusion about the Uniform Fiduciary Standard: “It’s just the right thing to do.”
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