Fiduciary Links: The Winner of the Latest Fiduciary Debate is….the Moderator
Posted by Duane Thompson on July 15, 2013
After a quick review of the major organization letters to the SEC on the quantitative costs and benefits of a uniform fiduciary standard, results are in. However, they are of the head-scratching variety that no doubt would give any economist a headache.
According to one letter submitted by the Securities Industry and Financial Markets Association, the main trade group representing Wall Street firms, under a fiduciary rule for brokers, the cost of a new disclosure form would average $5 million per firm along with $2 million in annual maintenance and training costs. Estimates on new compliance costs for RIAs under the SEC’s assumptions reached into the billions according to other letters. Take that to the cleaners, Wall Street.
Perhaps the one piece of missing data most needed by SEC economists is the benefits part of the equation. Considerable effort was made by some to project ball park benefits of a fiduciary standard for investors, but as the Financial Planning Coalition pointed out, much of that data resides with the large Wall Street firms, which hold the key to comparing investment performance and costs of 1 million fee-based brokerage accounts under the old Merrill Lynch rule before and after their conversion to advisory accounts.
Does this dearth of industry data worry the SEC? Certainly the SEC would welcome any nice package of data that would help make its job easier. More to the point, the SEC probably got what it expected – bits and pieces of data and polarized positions that continue to illustrate the great divide within the industry. Thus, the whole purpose of this complicated exercise was really twofold: get what data was readily available, and equally as important, conducting legal due diligence in the event the SEC is sued yet again over a flawed economic analysis. Currently the odds of the Florida Marlins winning the next World Series are far better than the SEC winning its next court challenge, given the agency’s abysmal track record in court.
The current stalemate is a far cry from the beginning of the Great Data Debate in SEC rulemakings, which can be dated back to 2005. That’s when Republican SEC Chairman William Donaldson voted with the two Democratic commissioners to approve a rule increasing independent members of an investment company board of directors from 50 to 75 percent. The vote took place only eight days after the U.S. Court of Appeals for the District of Columbia ordered the Commission to revise its cost-benefits analysis, and over the protests of Donaldson’s two fellow Republican commissioners. The subsequent rule and its ‘new’ economic analysis were little changed from the original rule.
At the time of the vote, dissenting Republican Commissioner Cynthia Goldman characterized the new economic analysis as “produced a mere three days after the Court’s opinion, contain[ing] what can only be described as a back of the envelope calculation of costs.”
It wasn’t the first time Donaldson voted with the Dems. In fact, he had completely alienated his fellow Republicans, leading to the current partisan impasse on fund governance and many other issues. After three years of trying to maintain the peace, Donaldson had had enough. Following the governance vote, the next day he resigned, citing a need to spend more time with his family.
Early the next year, the Court struck down the new independent director rule for a second time.
As an institution, the SEC has clearly learned its lesson on economic analyses. The halcyon days of turning around a new cost-benefits review in eight days and thumbing your nose at the second highest court in the country are clearly over.
Today, it’s unclear how much of the data from comments letters will be used by SEC economists in devising its own analysis. In a way, none of it really matters, as long as the SEC is able to demonstrate in a court of law that it did not act in an arbitrary or capricious manner, the bottom line standard for prevailing in an administrative challenge against a federal agency. Hence the request for data, along with an earlier invitation for general comments on a fiduciary standard, not to mention a future one that will accompany an actual rule proposal. All of these comment periods will be used by the SEC’s lawyers to argue in court, if indeed there is a lawsuit challenging a fiduciary rule, that it did what it could to generate a comprehensive cost-benefit analysis.
As moderator of this latest round in the fiduciary date, and notwithstanding the sometimes highly commendable and good-faith efforts by those involved, the SEC was the true winner. Since industry remains hopelessly divided on the costs and benefits of a fiduciary standard for brokers, the Commission is now free to develop a rule of its own. Whether it will do so is another question.
Now on to the rest of the best links from last week:
News and columns from the leading trade, consumer, and mainstream media:
- Massachusetts looking into sales of alternatives to seniors [InvestmentNews]
- In a Regulatory Roundtable, experts discuss some possibilities for what we might expect in a fiduciary rule from the SEC [InvesmentNews]
- A reminder that selecting and monitoring insurance requires its own special form of due diligence [ThinkAdvisor]
- Experts give their take on how an advisor can market his unique financial planning brand [Wealth Management]
- Investment Advisor surveyed presidents of independent broker-dealers on the issues affecting them and the results are in.
- Bob Veres shares an interesting case study on how one advisor did something about his dissatisfaction with traditional fee structures [Financial Planning]
From the organizations/associations/government/academia:
- The majority of advisers with custody of client assets are exempted from surprise exams [From GAO, IN coverage here]
- Could we see a Glass-Steagall Act 2.0 bring back divisions between commercial and investment banking? Elizabeth Warren, John McCain and others hope so. [Elizabeth Warren U.S. Senator for Massachusetts]
- Christine Benz interviews friend of fi360 Roger Wohlner on the “bucket” approach to retirement planning, an approach that may help investors understand asset allocation better. [Morningstar]
From the blogs:
- Some tips on how to start end-of-life conversations with clients [WSJ’s Wealth Manager Blog]
- A Social Security plan for unplanned early retirement [IN’s Retirement 2.0 Blog]
- Expect recent class action suits to establish fresh case law regarding the status of “church plans” and their exemption under ERISA [Boston ERISA Law Blog]
Articles your clients are reading (or should be):
- With hedge fund advertisements coming, will investors be enticed to jump in? [U.S. News’s Smarter Investor]
- A checklist for your mid-year review [U.S. News’s Smarter Investor]
Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.
