SIFMA's Taft makes anti-suitability comments but the fee crowd is wary

The watershed moment in the House Financial Services Committee hearing came today in response to a simple question: Which is the higher standard, fiduciary or suitability?

The six witnesses representing a broad swathe of the financial services industry each replied in turn, with very few caveats: the fiduciary standard.

A few years ago, this moment – coming amid other disagreements in the high theater of the hearing room — would have been unimaginable. But the financial crisis, with Bernie Madoff as its notorious symbol, has opened the door to re-regulation of financial services industry.

Even the Securities Industry and Financial Markets Association, which for years embraced the idea that broker-dealers needed to meet a standard that allowed them to sell products that were “suitable” for clients, acknowledged the superiority of the fiduciary standard.

Bruce W. Maisel, managing counsel for Thrivent Financial for Lutherans, testifying on behalf of the American Council of Life Insurers, also embraced the standard, although the insurance industry could take a big hit if sales of variable annuities were subject to the disclosures of the fiduciary standard.

The backlash against Wall Street has left SIFMA, which represents the world’s largest financial services companies, fighting a rearguard action to control the definition of fiduciary in whatever legislation passes, if any does. It is promoting a new federal standard that would come into play when an adviser or a broker-dealer delivers personal investment advice.

“SIFMA’s vision of a harmonized fiduciary standard is even stronger, and more pro-investor, than any other alternative we have heard advanced,” said Mr. John Taft, head of wealth management, RBC Wealth Management, who testified on behalf of the Securities Industry and Financial Markets Association.

But David Tittsworth, executive director of the Investment Adviser Association, Denise Voigt Crawford, Texas Securities Commissioner, Securities Administrators Board, who testified on behalf of the North American Securities Administrators Association, and investor advocate Mercer Bullard seemed to view SIFMA’s capitulation with some skepticism.

“Some industry affiliated groups have also called for the imposition of a fiduciary duty standard,” testified Voigt Crawford.. “However, upon close examination, their 'new federal fiduciary standard’ is hardly the pro-investor fiduciary duty that has permeated investment adviser regulation for over four decades.”

“Rather, the industry groups are advocating for the development and imposition of an undefined concept that would potentially supplant longstanding principles of fiduciary law embodied in decades of common law” she adds.

After the hearing, Taft, gesturing at the other witnesses, said, “We’re just splitting hairs. We all agree on fiduciary.”

Members of Congress at the hearing gave little indication of how the final legislation will be written, and how much will be left up to the SEC to write new regulations extending the fiduciary standard to broker-dealers.

SIFMA’s proposal that a federal fiduciary standard supercede state common law fiduciary standard came under particular fire. Bullard said that such legislation would mean that investors would no longer have the legal standing to sue broker-dealers under state common law, as they now do.

“The tiger is showing its stripes there,” he said.

A dose of reality

Any reporter writing about Capitol Hill has to constantly remind herself that very few pieces of legislation have much of a chance of passing.

The proposal to remake the regulation of the financial services (and impose a fiduciary standard on broker-dealers) has some chance of becoming law – but not an overwhelming one.

Even if such complex, multi-faceted legislation as is now on the table in the House Financial Services Committee passed the full House, a companion bill would have to be produced in the Senate, pass the Senate, and then be merged with the House legislation. The Senate Banking Committee is said to be drafting legislation – but nothing has been released yet.

Editor’s Note: Elizabeth is in the process of writing a second post looking at whether states should handle advisors with less then $100 million of assets under management.