The Battle over a Fiduciary Standard for Financial Advisors

The following is a guest post by Advisor World.

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama on July 21, 2010, few people expected the heated debate that would ensue over applying a regulatory uniform standard for professional financial advisors .

The Securities and Exchange Commission (SEC) is the agency tasked with drafting a fiduciary or uniform standard to ensure that financial advisors are indeed placing the interests of their clients before their own. The proposed rule has the support from the White House and particularly from Neal Wolin, Obama’s Deputy Treasury Secretary.

At a speech given by Wolin at the Pew Charitable Trust in Washington, DC on Tuesday, April 19th, Wolin sharply addressed critics who have voiced their displeasure with how the Federal government has reacted to the Dodd-Frank rulemaking effort. According to Wolin, regulators have been criticized for not being transparent during the implementation process; or that perhaps they aren’t moving fast enough.

But some of the bickering and dissent involving the promulgation of a rule has been internal. Two of the SEC’s commissioners have objected to a staff report sent to Congress. Kathleen Casey and Troy Paredes, two Commissioners appointed by former President George W. Bush, have expressed their concern over the report lacking adequate analysis. Over in the House of Representatives, Republican members of the Financial Services Committee are asking the SEC to put the brakes on the project until reports have been thoroughly reviewed.

Deputy Secretary Wolin has indicated his endorsement of the concept of financial advisors being held up to fiduciary standards. And while the White House may also be interested in the speedy implementation of a fiduciary standard, Wolin has also warned that as an independent agency the SEC cannot be pressed by the Obama administration on how to handle the rulemaking.

To an outside observer, the matter may seem entirely political. On the legislative and regulatory arenas, the fiduciary standard is mostly opposed by Republicans. But the issue is clearly beyond the political scope. The insurance industry and Wall Street have emerged as strong opponents of the regulation. Their argument is based upon the idea that a universal fiduciary standard for financial advisors or broker-dealers would only increase licensing and compliance costs for the industry. These new costs would correspondingly be passed on to consumers, as it is traditional to do so in such situations.

Regulation of financial advisors is just one of the Dodd-Frank financial reforms bogged down by debate and resistance. Republicans and lobbying groups like the Securities Industry and Financial Markets Association have joined forces in opposition to what they consider an arbitrary rushing of sweeping regulations.

The SEC does not foresee completion of the fiduciary standard rules for investment advisors until late in 2011. Until then, the Treasury Department has pledged to trudge on with implementation of Dodd-Frank’s other reforms. The issue has also picked up further interest among financial advisors and broker-dealers who support the formation of a Self-Regulatory Organization to head the efforts of enforcing a fiduciary standard of care.