Why Sen. Johnson's amendment is unnecessary and bad for investors

As has been widely reported this week, Senator Tim Johnson, has drafted an amendment that, if adopted, would put on hold the extension of fiduciary duty to brokers providing advice and instead require a study by the SEC of regulatory standards for brokers and advisers.  The amendment is the result of considerable lobbying done on the part of the insurance and brokerage industries.  However, consumer and advisory industry advocates for the fiduciary standard are concerned that Johnson's amendment is merely a stalling tactic. 

While it is true that harmonization of broker and adviser regulation and extending the existing fiduciary standard to brokers who provide advice will not be easy tasks, how a study would assist the process remains unclear.  A look at the amendment reveals that the SEC would be required to study "the effectiveness of existing legal or regulatory standards of care" and "whether there are legal or regulatory gaps or overlap" in those standards.  Such a request is puzzling, though, given that the SEC is the expert in legal and regulatory standards for brokers and advisers.  In fact, a recognition of existing gaps in regulation is what led the SEC to suggest to the Obama administration that harmonization and the fiduciary standard should be addressed in the plan the administration released last summer.

Johnson's amendment would require the SEC to consider several factors when conducting a study of broker and adviser standards of conduct.  In particular, the SEC would be required to consider how the protection under broker regulations compare to the protection under adviser regulations.  However, given that the RAND report, issued just two years ago, already addressed these different protections and investors perceptions of them, it's unclear what a new study would achieve.  Other factors the SEC would be required to consider are the impact and cost to entities and individuals of any changes in the standard of care for brokers and the impact on SEC resources.  However, as a result of significant administrative requirements, such impacts and costs would as a matter of necessity be quantified and considered in a rulemaking by the SEC.  Therefore, it's again unclear why a separate study is needed.

When considered as a whole, it is hard to understand how Johnson's proposal is anything but a delaying tactic given the SEC's significant amount of expertise in this area and the careful consideration the SEC would be required to undertake in any rulemaking it engages in to set conduct and other requirements for brokers and advisers.  In fact, it is puzzling why the information Congress would be asking for couldn't be provided through testimony or meetings with the SEC as well as in current legal and regulatory literature, rather than waiting for a report to be issued eighteen months after legislation is passed and delaying rulemaking for up to two years.   

The fiduciary debate is not new, and as recognized by the Committee for the Fiduciary Standard, the time for action is now. The Committee has asked its members to advocate against Johnson's amendment and has raised the following three key points for opposing the proposal:

1. All investors need protections afforded by the fiduciary standard, now.  As SEC Commissioner Walter has repeatedly pointed out, investors need to count on their adviser being held to the fiduciary standard and not worry about varying protections that different standards might provide.
2. The concerns expressed by lobby groups against the fiduciary standard are not generally held by brokers in the field.  According to a survey conducted by the Committee and SEI, a majority of brokers SUPPORT being held to the fiduciary standard.
3. Finally, most of the questions the proposal poses be addressed in the study are already answered or known in The Rand Report, other independent academic research, or through the SEC itself. The study is not needed.

Fi360 supports the advocacy efforts of the Committee and hopes that other supporters of the fiduciary standard will heed the Committee's call to action and contact Senator Johnson and his staff directly to voice their opposition to his amendment.