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New Voice at the SEC

You may have missed it, but Barbara Roper, who was the financial services face of the Consumer Federation of America—a tireless advocate for a fiduciary standard and consumer protection generally—has a new role to play.  She is now working at the SEC, as senior advisor to SEC chair Gary Gensler.

Roper’s best work at the CFA came when she would call out the hypocrisy of the brokerage firms, who would advertise that they worked diligently for the best interests of their customers, and then lobby vigorously against having to be held to anything like that standard by the regulators.  When brokerage firms lobbied for disclosure, Roper pointed out that their definition of the term was long, dense, opaque documents that no person in their right mind would read from beginning to end.  When brokerage firms argued that they functioned just like fee-only advisors, Roper suggested that their reps be required to register with the SEC and be regulated similarly. 

Having Roper as part of Gensler’s team is a really good sign for consumers and their only real advocates in the financial services profession: fiduciary advisors.  We’ve endured an unbelievably bad string of leaders at the SEC, going back to Harvey Pitt (8/3/2001 – 2/17/2003), but I would call out as the worst of the bunch Christopher Cox, Elisse Walter, Mary Schapiro, Mary Jo White and Jay Clayton, who all would give speeches about regulation that I suspect were ghost-written by wirehouse lobbyists.  Their idea of consumer protection was to protect the business models of their buddies on Wall Street, and I stand by my long-ago statement that the brokerage firms routinely “forbid” the SEC from imposing meaningful regulation or holding their reps to any standard higher than knowing enough about the customer to know what to sell him.  This is regulatory capture of the highest order; the government agency charged with protecting consumers from predatory brokerage activities evolved into a vigorous protector of the predatory brokerage activities themselves.

Will things change under Gensler, with advice from Roper—who knows all the Wall Street maneuvers and verbal sleights of hand?  The question in my mind is what could change. 

For instance, could the SEC decide that wirehouse brokers who give investment advice (which is all of them) must register as investment advisors, as the 1940 Act clearly intended? 

Could the SEC require unregistered brokers to give very clear disclosures to their customers, saying that they have successfully (cleverly?) evaded being held to a high standard of professional behavior?

Could the language of Reg. BI’s disclosures be revised to state that the broker works for the Member Firm, and is required to look out for the interests of the Member Firm above the consumer—and that the broker is also free to look out for his/her best interests at the expense of the consumer as well?  (The old joke: the ideal investment will benefit the customer, the firm and the broker.  Well, two out of three ain’t bad…)

Could the SEC require the brokerage firms to revise their incentive structures to be more in alignment with fee-only planners?

Could the SEC be more proactive about brokerage firm under-the-table shelf space payments disguised as “revenue-sharing?” 

Could the SEC eliminate the arbitration clause that says that consumer complaints have to be heard in tribunals cozily managed by FINRA—the brokerage firms’ own self-‘regulatory’ organization and ardent lobbyist?

Could the SEC require independent BDs to disclose, to consumers, the revenues they receive from annuity and other product providers for “marketing allowances” and exhibiting at their annual conferences?

More generally and broadly, could the SEC pivot, after all these decades of regulatory capture, toward actually protecting investors and consumers from predatory sales tactics?

The most interesting thing about this potential change of direction for the SEC is that a lot of wirehouse brokers would welcome it.  Many of them are actually working on behalf of their customers as fiduciaries, and whenever I talk with them, they proudly tell me that they’re successfully fighting against the constant barrage of messages and internal pressure advising them to only focus on “big” customers and to stop “overservicing” them.  I know a few brokers—who I think speak for many—who would like to get permission from their firms to register with the SEC.  If brokerage firms would ever take a poll of their brokers, they would find that only their top salespeople want to maintain the status quo.

If I had to make a bet, I would say that very little if any of these ‘coulds’ will get accomplished.  The SEC commissioners are appointed on a highly partisan basis; two are expected to lean toward consumer protection (nominated by Democratic administrations) and two are expected to argue that the most important protection we can offer is to make sure nothing bad happens to the brokerage industry in the name of “capital formation” (nominated by the Republican Party).  There are arcane rules that prevent this diverse group from getting together and working out their differences, and whenever the SEC proposes initiatives that might threaten the brokerage business model (not that we have seen any of those in decades…), the brokerage lobbyists will scream to their patrons in Congress, who will threaten to cut off SEC funding.

But that was a sure and certain bet a year ago.  Today, I can imagine that Roper might help Gensler figure out a way to enact at least some of the consumer protections that have been obviously calling for attention.  In fact, many of these are initiatives that Roper herself has called for when she was on the outside trying to get the SEC to pay attention to the lay customer and to promote, rather than fight, the consumer revolution of transparency that we’ve experienced everywhere but the brokerage industry.  It might be a long shot, but until Roper took this new position, I’d have said there was no shot at all.

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