Stockbroker proposal stuck in gridlock

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Three years after the U.S. Department of Labor proposed putting brokers who provide financial advice to retirees under the same fiduciary requirements as investment advisers, the changes remain stuck in political gridlock.

In October, the Republican-controlled House, with the support of Wall Street and the U.S. Chamber of Commerce, passed a measure that would bar the department from issuing new fiduciary rules until 60 days after the Securities and Exchange Commission finalizes its rule. It also requires the SEC to produce a report on the impact of the new rules. The White House threatened a veto.

"A lot of people in the financial services industry are very concerned about revising a regulation that's been in effect for 35 years," said Jan Jacobson, senior counsel for the American Benefits Council in Washington, D.C. The council is a public policy organization representing Fortune 500 companies and other employers who provide benefits to more than 100 million workers.

One of the central components of the proposed rule change is that stockbrokers handling company 401(k) accounts and Individual Retirement Accounts should operate under the higher "fiduciary" standard of conduct, rather than the lower "suitability" standard that has been used for years.

Brokers working under a suitability standard must know the client and the client's financial situation and then recommend products that are suitable. However, under a fiduciary standard, the broker must only recommend investments that are in the client's best interest, and treat the client's money as his or her own by acting with good judgment and prudence. The higher fiduciary standard also requires brokers to avoid conflicts of interest and provide disclosure of important facts and fees.

Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown, said applying the fiduciary standard to everyone who provides financial advice is a praiseworthy goal. But he said the mass of brokers in the financial services industry are not equipped to meet that standard, although it is in the best interest of the client.

"For advisers working on a commission, it's difficult to be a fiduciary," Mr. Fragasso said.

"They are working under a suitability rule, which was originally a New York Stock Exchange rule, which was adopted by all the regulatory agencies. They only need to consider if the investment is suitable for the client. Can the client afford the investment? Can they handle the risk?"

Those questions don't even speak to whether the investment is right for the client, he said.

The 2010 Dodd-Frank law required the SEC to study whether it should align the standards for stock brokers and investment advisers, who are already held to a fiduciary duty. In 2011, an SEC study called for imposing the fiduciary standard for advisers and brokerages.

The Department of Labor has been working on its own proposal but in 2010 withdrew an earlier version amid criticism from the brokerage industry.

The SEC solicited more data from the industry in March, in an effort to help inform whether it will proceed with writing new rules.

"The importance of the issue is of such great importance we are all willing to wait to make it so," said Andrew Stoltmann, a Chicago-based securities lawyer. "The rule changes are absolutely crucial if regulators are serious about cleaning up long-standing conflicts in the securities industry.

"I don't think there's any question that the rule changes are potential game-changers for everyone involved -- the employers, employees and financial companies."

The Associated Press and Reuters contributed. Tim Grant: tgrant@post-gazette.com or 412-263-1591980.


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