WASHINGTON -- An SEC advisory committee on Friday recommended that the commission appeal to Congress for authority to collect user fees from advisors to enhance its oversight of the RIA sector and enact rules to tighten regulation of broker-dealers.
Both proposals, which sailed through the SEC's Investment Advisory Committee on voice votes, call for tighter regulation of financial professionals to guard against conflicts of interest and other potential harms to retail investors.
In its RIA examination proposal, the committee is asking the commission to throw its weight behind legislation that would authorize a self-funding mechanism to step up its advisor exams. In a study mandated by the Dodd-Frank Act and released in 2011, the SEC suggested user fees as one of three mechanisms to increase oversight of advisors, alternately floating the idea that FINRA or a new self-regulatory organization could assume responsibility for the exams.
Any of those proposals would require an act of Congress, where opinion has been divided. But concerns persist that the SEC, operating with limited resources, hasn't been an effective regulator of the advisors under its purview. By the commission's own account, it examined only 8% of registered advisors in fiscal 2012; 40% have never been put through an audit. That means that, on average, advisors could easily operate for more than a decade without having to face an examination, according to Craig Goettsch, vice chairman of the advisory committee and the director of investor education and consumer outreach for the Iowa Insurance Division.
"The commission lacks the resources and ability to really examine this part of an area where they have responsibility to protect investors," Goettsch says, arguing that, in a time of budget austerity, user fees are the only practical way to boost the SEC's funding. "We're just going to tread water if we're going to ask for an appropriation."
In turn, rules to extend a fiduciary duty to broker-dealers that are already in place for advisors would seek to close a "regulatory loophole" that holds financial professionals who provide similar services to different standards, according to Barbara Roper, chairman of the SEC subcommittee that drafted the proposal and the director of investor protection at the Consumer Federation of America.
"This is sort of the other side of the coin," Roper says of the fiduciary proposal. "If the primary concern in the investment advisor area over the years has been that they're subject to inadequate regulatory oversight, the primary concern in the area for broker-dealers, at least for our organizations, has been that they have been allowed to essentially recast themselves as advisors over the years without having to meet the appropriate standard for their advice. So if you look at the market today, brokers typically call themselves financial advisors. They offer services such as investment planning and retirement planning that are advisory in nature. They market themselves as if advice were the primary service they offered and product sales were solely incidental to that advice. And yet when they offer that advice, they're subject to a different standard of conduct than all other advisors."
The distinct classifications of broker-dealers and advisors date to securities laws from the 1930s and 1940s. Under the current regulatory regime, advisors' fiduciary duty mandates that they make recommendations in the best interests of their retail clients, while broker-dealers are held to the looser standard of providing advice deemed suitable for investors.
Roper argues that the suitability standard, which does not require the level of disclosure associated with fiduciary duty, may be an appropriate level of regulation for brokers when they are acting as salespeople, but not when they are providing advisory services. There is, in fact, harm to investors because we know that investors treat these relationships as relationships of trust," she adds.
The SEC has yet to make a formal recommendation to Congress on legislation to increase oversight of advisors, though advocates of funding exams through RIA user fees insist that the 2011 study -- a staff-level report -- appeared to favor that option. The issue had a brief moment in the spotlight in June, when the House Financial Services Committee held a hearing exploring the implications of the user-fee proposal as well as giving oversight authority to FINRA or another body. But the committee, now under a new chairman, has shown little appetite for revisiting the issue in the current Congress.
In contrast, SEC Chairwoman Mary Jo White, who took the reins of the commission in April, has said frequently that a uniform fiduciary standard for brokers and advisors is a needed step to address investor confusion and is a high priority at the commission. Nonetheless, at an industry conference earlier this month, she declined to offer a timeline for when the commission might issue a proposed rule.
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