The SEC’s proposal to update the standards of conduct for brokers and advisors
The SEC's bundle of proposed regulations for the advice industry looms large for Schwab and other custodians — as well as the RIAs they serve. No wonder that this issue, which could entail some significant changes to the industry, is at the center of the annual advocacy day the Investor Advisor Association convened on Capitol Hill.
Keeping brokers and advisors on a separate regulatory track, and not imposing a fiduciary standard on brokers, could preserve a “competitive advantage” that RIAs enjoy, said Jeff Brown, senior vice president and head of the Schwab’s Office of Legislative and Regulatory Affairs.
“Some might argue it doesn’t go far enough,” Brown said on a conference call previewing the firm’s message to lawmakers. “We think for advisors that’s a good thing, because they will still be able to claim they are subject to a higher standard.”
Schwab isn’t uniformly in favor of the SEC's proposal. The commission floated the idea of imposing broker-like requirements on advisors to mandate federal licensing, set continuing education obligations, and impose net capital standards for RIA firms.
Of course, Schwab isn’t uniformly in favor of the proposal the SEC has produced. The commission floated the idea of imposing broker-like requirements on advisors to mandate federal licensing, set continuing education obligations, and impose net capital standards for RIA firms.
“Advisors will be coming in to express the view that these things aren’t necessary,” Brown said.
Schwab is preparing a comment letter in response to the SEC’s call for feedback on its advice proposal, official say. However, the firm is likely to question the need for additional advisor regulations, Brown says.
Schwab advisors and members of the firm’s policy team — along with a host of other RIAs that were in Washington for the IAA’s advocacy day held on June 13 lobbied lawmakers about what they do and don’t like in the SEC’s proposal.
“Then they can translate that to an oversight role when the hearings come along,” Brown said. “What you’re really doing is laying groundwork for future hearings, future questions.”
More than 50 advisors from 24 states took part in the IAA’s advocacy day, visiting more than 75 House and Senate offices, according to a spokesman for the group.
The IAA appears poised to deliver a slightly different message from Schwab’s view on the proposed standard for brokers. The association is concerned the brokerage provisions in Regulation Best Interest might be too narrow and only apply to specific investment recommendations made to retail investors.
Senior IAA officials and the majority of the group’s Board of Governors met Tuesday morning with SEC Chairman Jay Clayton and three other commissioners. Only Democrat Kara Stein, who cast the sole dissenting vote against advancing the investment advice rulemaking package, did not meet with the IAA.
Separately, advisors and their advocates are pressing for reforms to the recently enacted tax overhaul to allow RIAs to count their management fees as itemized deductions and to qualify as pass-through businesses eligible for a 20% tax deduction. Those two provisions of the 2017 tax bill “unfairly disadvantage investment advisory firms and their clients,” the IAA
“There’s a bit of a tax hangover,” said Lisa Hunt, Schwab’s executive vice president of business initiatives, who also chairs SIFMA.
Largely absent from this year’s discussions with lawmakers: talk about a longstanding industry priority of expanding the SEC’s capacity to examine RIAs — something the IAA and others have championed in a bid to keep an outside group such as FINRA from taking on oversight authority in the advisory space.
The SEC’s own efforts to increase its exam rate have been met with approval on the Hill, and there is little appetite to reopen the debate on that subject, according to Schwab’s Brown.
Another facet of the SEC’s advice proposal where the industry can be expected to make its voice heard concerns the new disclosure requirements proposed in the commission’s regulatory package.
“That disclosure area is a big one,” said Hunt, who noted that SIFMA is currently putting together a substantial comment letter in response to the SEC’s proposal.
In particular, the proposal for a new Form CRS — customer relationship summary — is drawing industry scrutiny. The template the SEC offered is considered overly prescriptive, imposing an unnecessary and in some cases duplicative compliance burden for professionals who wear two hats in the industry, suggested both Hunt and Brown.
“It’s going to be very difficult for broker-dealers who are dually registered as advisors,” Brown said.
“They’ve created a model that we think needs adjusting.”
Still, the SEC’s work on standards of conduct for brokers and advisors who provide advice to retail clients is viewed favorably by Schwab. There is broad unity among SIFMA’s members on the issue, said Hunt. She predicted that the SEC’s proposal could enjoy broader bipartisan support than the bitterly disputed — and now
“I do think there is a general desire to increase financial literacy, to increase the ability of investors to invest,” Hunt said. “If there’s anything they can unite around, perhaps this is it. I’ll take maybe an optimistic view about this.”
