The Debate Over Broker Standards

By Susanne Craig

Is one standard better than two, or will something in between suffice?

For a window into just how complicated it will be for regulators like the Securities and Exchange Commission to sort out the Dodd-Frank legislation, one need look no further than the debate raging over the regulation of stock brokers at the fall conference of state securities regulators, known as the North American Securities Administrators Association or Nasaa, which began in Baltimore on Sunday.

At the heart of the issue: Investors typically get advice from either a broker dealer or an investment adviser. Broker dealers are not considered fiduciaries, meaning they may sell their clients products that are suitable but not necessarily the most advantageous. In some cases these products can offer higher fees for the broker. But investment advisers have an obligation to act in their customer’s best interest. Some state regulators want one standard, rules that hold broker dealers to a higher standard closer to that of a fiduciary.

The decision on what to do is in the hands of the S.E.C., which under the new legislation has six months to study the issue and come back with some ideas.

“Our fear is the S.E.C. will come up with a lower standard for the investment advisor,” said Denise Voigt Crawford, Texas Securities Commissioner and outgoing president of Nasaa. “If you give advice, we [Nasaa] are advocating one standard, and that is the current standard for investment advisers.”

Others at the conference feel adopting one standard is problematic, creating issues for firms that often act as advisers but then separately sell to clients securities and bond offerings they also underwrite.

The S.E.C. entered the debate Sunday afternoon on a panel called “Navigating Reform.” While one senior S.E.C. official acknowledged the differing standard has caused confusion among mom and pop investors, she didn’t tip her hand on what the agency has planned.

“Most people don’t know if their adviser is an investment adviser or a broker dealer,” said Jennifer McHugh, a senior advisor to Mary L. Schapiro, the S.E.C. chairman. “That is because most investors just want a straight story.”

On a panel Monday, major industry players weighed in. On a panel called “Practical Consequences of Reforming Your Business Model” Gary Klein, deputy general counsel of regulation for the LPL Financial Corporation, said his firm favored “harmonizing” the standards for broker dealers and investment advisers.

“The state of the fiduciary duty is pretty much like the state of hair for men my age,” he told the audience. “We know change is coming, we just don’t know how bad the fallout is gonna be.”

He expects the changes, likely to result in a higher standard for broker dealers, will increase litigation and other costs for LPL, which has 12,000 financial advisers worldwide.

URL to Original Article: http://dealbook.blogs.nytimes.com/2010/09/27/the-debate-over-broker-standards/?src=twt&twt=nytimesbusiness