Republican S.E.C. commissioners oppose new broker recommendations

In a dissenting statement to the Security and Exchange Commission's proposed recommendation that insurance and stock brokers be required to put their clients' interests first, S.E.C. commissioners Kathleen L. Casey and Troy A. Paredes contend that the S.E.C. hasn't investigated the potential impact of the new recommendations.

As the New York Times explains, the recommendation itself was the outcome of a study undertaken pursuant to "the Dodd-Frank financial regulatory overhaul law." After receiving more than 3500 comments, the S.E.C.'s staff concluded, "most people say they believe these investment professionals — all of them — are working in their own best interest." However, "[t]oday, only investment advisers are required to operate in that manner."

Insurance brokers, who sell products like variable annuities, and stock brokers, many of whom call themselves advisers, are required only to recommend investments that are suitable. That means they can potentially sell you a product that is more lucrative for them when a better option is available. And that’s perfectly fine in the eyes of the law.

Thus the S.E.C.'s staff

recommended that stock and insurance brokers be required to act as fiduciaries — in other words, they would need to put their client’s interests first when providing personalized financial advice.

Commissioners Casey and Paredes, both Republicans, think investor confusion as to the fiduciary duties of different kinds of financial advisors is not adequately understood:

Such confusion is a serious matter. However, the practical consequences resulting from that confusion for those very investors have not been sufficiently studied or documented. Moreover, the Study does not address the possibility that the Study's own recommendations will not resolve or eliminate investor confusion and may in fact create new sources of confusion.

This argument is quite flimsy. As a financial layman I can tell you, the S.E.C. staff's recommendation makes a hell of a lot more sense to me than this ominous but completely abstract warning of unintended consequences. What do Casey and Paredes think "the practical consequences" of investor confusion have been? If they think the rest of us are missing something obvious, whey don't they tell us what it is? Similarly, why don't they explain what "new sources of confusion" they see in the offing? Absent specifics, they're just fear-mongering.

Casey's and Paredes' second objection is less vague:

... the Study, in our view, does not appropriately account for the potential overall cost of the recommended regulatory actions for broker-dealers, investment advisers, and retail investors. The Study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive. Any such results are not in the best interests of investors; nor do they serve to protect them.

I can imagine that too much regulation could kill an industry. I just don't see that happening in this case, though. People who want investment advice in today's regulatory environment will still want advice in the proposed environment, too.

Might some existing insurance and stock brokers no longer be able to compete in a cost-effective way due to the increased cost of complying with that new regulatory environment? I suppose that's possible. On the other hand, unmet demand tends to induce someone to meet it. I don't see the proposed new regulatory regime having a long-term effect on the number of advisers.

Might there be "fewer products and services"? Only if those products and services weren't appropriate for customers, is my guess.

Might costs go up? Again, I suppose it's possible. On the other hand, would those increased costs outweigh the amount of money insurance and stock brokers' customers are leaving on the table because those brokers are more concerned with their own bottom line than their clients'?

I'm a layman, so I know better than to hazard a guess as to that question. On this score, it might indeed make sense to conduct further study. After all, the fact that those brokers are legally allowed to look after themselves first doesn't mean they all do. I also have no idea what the increased costs for having a formal fiduciary duty to one's clients would be.

Still, Casey and Paredes come off as stonewallers trying to stand for the entities they're supposed to be regulating, rather than advocates for, or at least defenders of, individual investors.