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SEC to face the F-word in 2014

By Sheyna Steiner ·
Wednesday, December 4, 2013
Posted: 5 pm ET

The long-awaited rule from the Securities and Exchange Commission establishing a fiduciary standard for broker dealers will take a little bit longer.

In the Dodd-Frank Act, signed into law in 2012, the SEC was tasked with finding out if investors would benefit from a higher standard of care when they get investment advice. The agency studied the issue and came to the conclusion that it would benefit investors. Shocking! Studies have found that investors generally have no idea what kind of standards brokers operate under, but they are under the impression that their broker won't sell them something that is not in their best interest. In fact, broker dealers operate under a looser "suitability" standard, which I'll get to in a minute.

A fiduciary standard for broker dealers would establish a rule that financial professionals who give investment advice have to put the client's best interest first. But that rule won't come for at least another year.

The SEC recently issued its agenda for 2014 and the fiduciary standard has been shifted to the back burner, listed as a long-term action, the website reported on Monday.

"I do think that the chairman, Mary Jo White, is serious about moving it forward. She just has too many things on her plate at this point," says Duane Thompson, senior policy analyst at fi360, a fiduciary consulting and education firm.

Even though it may be close to the end of next year before more action on the fiduciary issue is taken by the SEC, there is evidence that the industry is quietly moving toward an acceptance of a higher standard. Even if they don't use the f-word, says Thompson.

"Last July, a year ago in 2012, FINRA adopted a strengthened suitability requirement for brokers," he says. FINRA stands for Financial Industry Regulatory Authority.

Brokers have worked under the suitability standard, which means that investments must be appropriate for an investor's objectives, time frame and pocketbook. Now the suitability rules have more factors brokers must consider before suggesting an investment option.

The new rule from FINRA "introduced the concept of acting in the best interest of the customer," Thompson says.

A report from the Investment Advisory Committee within the SEC, released near the end of November, expressed support for a fiduciary standard and recommended that the agency pursue such a rule. The report also concluded that user fees for broker dealers could provide the needed funds for enforcing higher standards.

Not coincidentally, earlier this year, a bill was introduced in the House of Representatives by ranking member of the Committee on Financial Services, Maxine Waters, D-Calif., that would charge SEC-registered advisers fees to help the agency cover the cost of exams.

"The SEC can't do that itself unless it gets legislative authority from Congress. Nobody is operating in silos here," Thompson says.

The winds seem to be blowing in the direction of higher standards of investor protection -- but it may take some time.

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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James Rich
December 19, 2013 at 6:37 am

Great Article. Thanks for sharing.
Keep posting the good stuff.