Wall Street

S.E.C. Study Recommends More Oversight of Brokers

Posted on Tuesday, January 25, 2011

WASHINGTON — Investment advisers and stockbrokers should be subject to the same fiduciary standard of conduct — putting a customer’s interests above their own — rather than the different governance regimes that currently apply to the two groups, the Securities and Exchange Commission recommended on Saturday.
In a report closely watched by Wall Street, the commission’s staff said retail investors “generally are not aware” that stockbrokers and their firms are subject to a lesser legal standard, one that requires brokers to make sure the products that they sell are suitable for their clients. Investment advisers are already subject to the higher fiduciary standard.
The recommendation that the higher standard of fiduciary duty apply to both groups is intended to “increase investor protection and decrease investor confusion in the most practicable, least burdensome way for investors, broker-dealers and investment advisers,” the report said.
Wall Street groups and investor advocates generally applauded the recommendations. The Securities Industry and Financial Markets Association, a brokerage firm trade group, said it also supported beefing up examinations of financial advisers, which generally are subject to less rigorous oversight than brokerage firms.
The five S.E.C. commissioners did not vote on whether to adopt the study’s recommendations, but the two Republicans issued a statement criticizing the study, saying it “fails to adequately justify its recommendation” and “lacks a basis” to conclude that a uniform standard would enhance investor protection.
The study and report to Congress were required by the Dodd-Frank Act, the regulatory overhaul passed last year to address the causes of the financial crisis. Most of its recommendations could be accomplished through rule changes by the S.E.C.
Whether the commission has the resources to enforce its recommended changes is uncertain. In a separate report to Congress issued on Wednesday, the S.E.C. concluded that the agency lacked the money and staff needed to conduct timely and effective examinations and oversight of registered investment advisers.
The agency’s acknowledgment of its own shortcomings has broad implications. A failure by the S.E.C. to adequately examine the books of Bernard L. Madoff’s investment advisory business contributed to the losses suffered by investors in that Ponzi scheme, the S.E.C.’s inspector general concluded in 2009.
The study on adviser examinations recommended that Congress take action to strengthen the investment adviser examination program, including possibly imposing user fees on investment advisers to pay for examinations or authorizing an industry self-regulatory organization to take over examination of the firms, under S.E.C. oversight.

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