SIFMA Submits Comments Regarding SEC Broker-Dealer Fiduciary Duty Recommendations (with Lofchie Comment)

SIFMA submitted comments to the SEC in response to the recommendations made by the "Investor as Purchaser Subcommittee" as to how the SEC should implement a fiduciary standard applicable to broker-dealers that provide investment advice to retail investors.

In the comment letter, SIFMA stated that many of the recommendations in the draft are in accord with SIFMA's views on how to implement Dodd-Frank Section 913 ("Study and Rulemaking Regarding Obligations of Brokers, Dealers, and Investment Advisers") while preserving the broker-dealer business model.

SIFMA also noted a few places where the Recommendations "are incongruous with the intent and requirements" of Section 913 and do not preserve the broker-dealer business model, however. SIFMA stated that "these incongruities may be attributable to the fact that the Subcommittee (and indeed, the Committee) does not have a single broker-dealer representative."

SIFMA stated that it disagrees with the assertion that the SEC's Section 913 cost-benefit analysis acknowledges the harms that can result from advice delivered under the current broker-dealer suitability standard. According to SIFMA, there is no evidence that investors are being harmed, and imposing a "harm" requirement would only serve as an insurmountable obstacle to implementing Section 913. Additionally, SIFMA disagreed with the subcommittee's primary recommendation that the SEC should not follow what Section 913 requires, "but should strike out on its own and write rules to narrow the broker-dealer exemption under the Advisers Act, so that broker-dealers could no longer offer retirement planning or investment services to their clients." SIFMA stated that this approach would be grossly anti-competitive, unfair, and completely out of line with Section 913's promise of a business model neutrality.

Lofchie Comment: The SIFMA comment letter observes that it is not surprising that a panel made up of investment advisers and securities industry critics decides that greater regulatory burdens should be imposed on broker-dealers. The Investor as Purchaser Subcommittee seems to reflect either the pre-existing biases of the panel members or their economic interests. Unfortunately, the panel ignores the fundamental and difficult policy question: what is an economic model that allows retail investors to obtain personalized investment advice? Most retail investors probably do not have $50,000 to invest. But assuming a $50,000 investment, and assuming a 1% annual investment advisory fee (which is not insubstantial), the retail investor would be able to pay an investment adviser $500. How much personalized investment advice can the investor really buy from an adviser for $500? Probably little or none. If the effect of the Advisory Committee's Recommendations is that a broker is prohibited from providing any personalized advice to such a retail investor, does that mean that the investor is effectively priced out of the market or perhaps pushed into a market that charges the investor higher fees? It all sounds very nice to push for imposing even more duties on broker-dealers, but there ought to be greater consideration paid to how small investors will be able to pay for these required services. Any recommendation that pushes for imposing greater duties on broker-dealers but says nothing about costs to investors, and whether investors can bear these costs, is just ducking the real questions.

See: SIFMA Comment Letter. See also: Draft of Recommendation of the Investor as Purchaser Subcommittee Broker-Dealer Fiduciary Duty.