SIFMA Submits Cost Estimates to SEC on Fiduciary Rulemaking (with Lofchie Comment)

SIFMA released its response to a data request by the SEC to help inform the agency's cost-benefit analysis of a uniform fiduciary standard for broker-dealers and investment advisers under Dodd-Frank Section 913. For the first time, the industry provided estimates on the cost of complying with a uniform fiduciary standard. In its letter, SIFMA:

• Stated its support for a uniform fiduciary standard of conduct, though it also stated that such a uniform standard must take account of the fact that broker-dealers provide a different service to customers than to investment advisers (e.g., broker-dealers generally provide discrete (in time) nondiscretionary advice, while investment advisers often provide ongoing discretionary advice);
• Raised concerns about potential rulemaking by the Department of Labor to expansively redefine "fiduciary" under the Employee Retirement Income Security Act ("ERISA"); and
• Provided estimates as to the cost of implementing a fiduciary standard for broker-dealers.

Lofchie Comment: "Fiduciary" is one of those standards - like fair - that no one wants to oppose, even though no one knows what it means in practice. The SIFMA letter deals with this definitional problem by conceding immediately that broker-dealers should be subject to a "fiduciary" standard (whatever that is), and then moving on to the more important and substantive discussion of just what that means in practice.

The SEC is in a somewhat difficult place on this issue because it always has been willing to be honest and to acknowledge that the higher the "fiduciary" standard it imposes, the more the SEC will both raise costs to investors and force smaller investors out of the brokerage system, since there is no way for brokers to recoup the increased costs of serving those smaller investors.

There are a number of substantive questions, including, perhaps most significantly: What should be the obligation that a broker-dealer has in servicing its customers who pay commissions?

Whatever rules are eventually adopted (and it would seem that more rulemaking is inevitable), the SEC should conduct a study of how the rules affect retail investors, and whether smaller investors, in particular, are actually helped by any eventual new rules or priced out of the market.

See: Full SIFMA letter.