The Securities and Exchange Commission (SEC) just released the much-anticipated studies that are defensively subtitled: “As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” One of the Dodd-Frank reports is the Study on Enhancing Investment Adviser Examinations, a 40-page effort; the other report is the Study on Investment Advisers and Broker-Dealers, which weighs in at a whopping 208 pages, replete with several hundred footnotes, charts, an Appendix A, and a second cleverly named Appendix B.
Notwithstanding the two-for-one nature of the SEC's Staff's studies, it's all pretty much one study about how best to regulate broker-dealers, investment advisers, and the whole shebang of who sells what on Wall Street. So, if you don't mind, I'm just going to roll those two studies into one humongous mess and refer to the result as "the Study."
Don't let the size of the Study mislead you: There are no directions on how best to get from Point A to Point B; instead, you have a roadmap of the United States securities markets.
Cutting to the Chase
My suggestion is that rather than plow through the document, just turn to pages 165-166, which give the gist of the Study (footnotes omitted) :
Despite the extensive regulation of both investment advisers and broker-dealers, retail customers do not understand and are confused by the roles played by investment advisers and broker-dealers, and more importantly, the standards of care applicable to investment advisers and broker-dealers when providing personalized investment advice and recommendations about securities. Retail customers should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations. Instead, retail customers should be protected uniformly when receiving personalized investment advice or recommendations about securities regardless of whether they choose to work with an investment adviser or a broker-dealer. At the same time, it is necessary that such protection allows retail customers to continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide.
Therefore, this Study recommends that the Commission exercise its rulemaking authority to adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. In addition, the Study recommends that when broker-dealers and investment advisers are performing the same or substantially similar functions, the Commission should consider whether to harmonize the regulatory protections applicable to such functions. Such harmonization should take into account the best elements of each regime and provide meaningful investor protection.
The Staff’s recommendations were guided by an effort to establish a uniform standard that provides for the integrity of personalized investment advice given to retail investors. At the same time, the Staff’s recommendations are intended to minimize cost and disruption and assure that retail investors continue to have access to various investment products and choice among compensation schemes to pay for advice.
The views expressed in this Study are those of the Staff and do not necessarily reflect the views of the Commission or the individual Commissioners.
Nearly half a year after the Study was authorized and god only knows how many dollars and wasted hours (likely diverted from the more important task of actually catching the bad guys), the SEC’s Staff recommends the adoption of uniform standards – without actually spelling out the language of those standards.
You ever order a cappuccino and they just bring you a cup of froth?
From The Sublime to the Ridiculous
Let's start with a refresher course. There are four SEC Commissioners. There is one SEC Chair. There are thousands of employees who constitute the SEC Staff. The Staff proposes but the commissioners and chair dispose. Sometimes the Staff is rowing north and the commissioners are rowing south. When things get really nuts, the Staff is rowing north, the Chair is rowing south, two of the commissioners are rowing east, and two other commissioners are rowing west.
In case you like to put faces to a story, here are the faces that you should know:
|What If A Much Of A Wind . . .
On January 19, 2011, SEC Commissioner Elisse Walter issued a statement about the Study – yup, a statement about a study. In her comments, Commissioner Walter she notes:
[I] am quite disappointed with the result. Although I voted to release the study, for the first time in my tenure as a Commissioner, I feel that it is necessary for me to write separately in order to clarify and emphasize certain facts, and ensure that Congress knows that the current resource problem is severe, that the problem will only be worse in the future, and that a solution is needed now. I have spent many years considering these issues, and have definite and clear views on them. . .
Also, the study attributes virtually no disadvantages to the user fee option, but many disadvantages to the SRO and FINRA dual registrant options. The study does not lay out the variety of viewpoints regarding the SRO option, instead emphasizing those of the investment management industry and others who have concerns about the SRO option.
Thus, let me undertake to balance the discussion in the study by providing some clarification. Despite implications in the study that the establishment of an SRO would not enhance the Commission’s own oversight resources, I believe that the SRO model has, in fact, benefitted regulation of the securities industry for more than seven decades. I also believe that the SRO option has significant and long-term benefits to investors and the Commission, and I am on record as supporting it—although I do not believe that there has to be a single SRO or that it has to be FINRA.
Ouch!! But, hold on, we’re not done . . . not by a long shot.
We Two Too
SEC Commissioners Kathleen L. Casey and Troy A. Paredes issued their own statement about the Staff’s report. In a document titled: Statement by SEC Commissioners: Statement Regarding Study On Investment Advisers And Broker-Dealers (January 21, 2011) , we learn that Commissioners Casey and Paredes are unhappy campers:
[I]n our view, the Study's pervasive shortcoming is that it fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors. The Study recommends the adoption of a new uniform fiduciary duty standard and harmonization of two disparate regulatory regimes. But it does so without adequate articulation or substantiation of the problems that would purportedly be addressed via that regulation. The Study also does not adequately recognize the risk that its recommendations could adversely impact investors. . .
Because of our concerns, we oppose the Study's release to Congress as drafted. We do not believe the Study fulfills the statutory mandate of Section 913 of the Dodd-Frank Act to evaluate the "effectiveness of existing legal or regulatory standards of care" applicable to broker-dealers and investment advisers. . .
Much is at stake. Americans invest trillions of dollars through broker-dealers and investment advisers. Regulation based on poorly-supported recommendations runs the risk of restricting retail investors' access to affordable personalized investment advice and the range of products and services they currently enjoy.
There is no statutory deadline for any follow-on rulemaking to this Study. Given the lack of concrete data provided in the Study and the need for additional research and analysis, we believe that any rulemaking without such consideration would be ill-conceived at best and harmful at worst.
Like I Said Before
Way back in November 2009, nearly 14 months before the SEC’s Study was released and months before the very study even began, I published: "Regulating Wall Street By J. Wellington Wimpy: Don't let Wall St. regulate itself" (by Bill Singer, November 2, 2009):
[T]he House Committee on Financial Services began consideration on Oct. 1, 2009, of the Discussion Draft of the Investor Protection Act of 2009 (to be reported as H.R. 3817) which is supposed to provide the Securities and Exchange Commission with additional authorities to protect investors from violations of the securities laws. On Oct. 28, 2009, the Financial Services Committee approved an amendment to the Investor Protection Act that moves the oversight of investment advisory firms with less than $100 million in assets under management (AUM) to state securities regulators. . .
Not resolved by the Financial Services Committee was the question of whether any of those firms supervised by the SEC or the states will also fall under the ambit of a self-regulatory organization (SRO). The Financial Industry Regulatory Authority (FINRA) has tossed its hat into the ring and appears to be actively lobbying for that investment advisory SRO slot. Opposing FINRA's designation and seeking to create a new investment advisory SRO is the Financial Planning Coalition, which is composed of the Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA).
The House Committee could have authorized an amendment to enable a new investment advisory SRO. It could have chosen FINRA. It could have called upon the Financial Planning Coalition to create a new SRO. Frankly, the Committee could have and should have made a choice – a hard one, perhaps, but do something. Instead, in the best (or worst) traditions of Capitol Hill, the committee opted for the worst alternative. It did nothing. Well, that's not totally accurate. Our politicians did what they do when they want to give the impression of action and progress. They called for a study and a report. . .
I see this aspect of the committee's legislative role as shameful--sorry, but strong words are required for such pusillanimous behavior.
Surely, there is enough information before the members of the Financial Services Committee as to whether self-regulation is a viable form of Wall Street regulation in this day and age. Forests of trees are now devastated to produce the paper on which self-serving studies and reports have been printed by both sides of the SRO debate. If you wish more than that, how about simply Googling that SRO query and sitting at a computer screen for several hours (if not days) as you plow through the massive number of hits?
Further, what more history does the committee need to review to determine whether FINRA performed commendably during the past few years--and whether such results constitute a track record that should promote that SRO for an expanded role? For example, see FINRA's Dubious Report (Madoff, Stanford, et al.)
Then there is the even more inexplicable rationale inherent in charging the SEC with investing six months of its staff's time and resources on the production of yet another report on an issue that has already been debated to death. I mean, seriously, doesn't that limited SEC staff have more important things to do than rehash old stories and positions for congressional committees, which should be allocating their own staff resources to such a moronic exercise? How about you let the Wall Street cops go after the bad guys? Don't our elected officials think that there is enough of such police work to keep the SEC busy?
Then there is this interesting dilemma, which must be known to Rep. Maloney and her colleagues: Of the five present members of the SEC (including the chair), two appear to have some significant conflict involving the NASD and FINRA. . .
Also, there is this disclosure about SEC Commissioner Elisse Walter:
"Prior to her appointment as an SEC Commissioner, Ms. Walter served as Senior Executive Vice President, Regulatory Policy & Programs, for FINRA. She held the same position at NASD before its 2007 consolidation with NYSE Member Regulation.
"Ms. Walter coordinated policy issues across FINRA and oversaw a number of departments including Investment Company Regulation, Member Education and Training, Investor Education and Emerging Regulatory Issues. She also served on the Board of Directors of the FINRA Investor Education Foundation."
I'm not sure that the Committee thought through the referral to the SEC of the SRO issue. Schapiro and Walter's prior relationships with NASD/FINRA raise legitimate questions as to whether those two individuals are conflicted and should recuse themselves from participation in the preparation of the requested report. . .
NOTE: For a more detailed consideration of the shenanigans leading up to the passage of Dodd-Frank, read: "Rep. Bachus Slips One In (and not everyone is cheering)." (by Bill Singer, November 3, 2009).
As much as I would like to bask in the glow of “I told you so,” the issues presented in the Study are too serious for such a victory lap. Little that is being debated today has not been debated for years. Few of the folks who are engaged in the debate are only now raising their points – their voices have been raised for years. You only need to consider the points raised in The Death of The Salesman (by Bill Singer, August 7, 2009) to understand that the Study was unnecessary and not calculated to contribute anything meaningful to the age-old debates.
Why did Congress waste yet more time on another study whose outcome was doomed from the start? Why didn’t Mary Schapiro stand up before the glare of the television lights and refuse to waste her staff’s valuable time on such nonsense? Sadly, I think I said it best in At The Head Of The Roundtable. (by Bill Singer, October 2, 2009):
Once upon a time, kings made decisions at the risk of losing their heads and kingdoms. In olden days, rulers didn't take polls, they didn't waste time with self-serving panels--those in power wielded power. My, what a novel concept! You're hired to do a job and you do your own homework, make your own decisions and put your reputation on the line. You take personal responsibility for your actions.
We have become a nation that ponders everything without resolution. No one is in charge of anything. Our lives are run by committee--or Roundtable. It is a nightmare of debates and discussions that go on endlessly.
Some fifty years ago, President John F. Kennedy spoke of accomplishment rather than debate. In a speech at Rice University, Houston in 1962, he issued this challenge:
We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.
It is for these reasons that I regard the decision last year to shift our efforts in space from low to high gear as among the most important decisions that will be made during my incumbency in the office of the Presidency.
Sadly, America's Can Do spirit has become a museum piece, displayed in a case with long-ago collected moon rocks. The people who first landed on the Moon can't even reform Wall Street. Instead, we stand on the shore, a wet finger forever raised to find the wind -- but we never set sail.
Whatever happened to high gear in America?