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Time for SEC’s Schapiro to Resign?

September 15
21:59 2011

There is great risk for me to write this, not as a journalist, but as Chief Compliance Officer of several entities regulated by the Securities and Exchange Commission. First, in terms of full disclosure, the SEC has always been fair and helpful in auditing SECSeal_300my firms. My comments here deal solely with SEC Chair Mary Schapiro’s actions since the start of the year as they pertain to adopting a uniform fiduciary standard.

It all began on a late Friday in January when the SEC released its much anticipated Report on the Fiduciary Standard (see “SEC Fiduciary Report: Who Won? Advisers? Brokers? Or 401k Plan Sponsors?Fiduciary News, January 22, 2011). The report, which turned out to be more partisan than expected, became a lightning rod for those against “big government” and intent on cutting government spending (see “Reaction to SEC’s Fiduciary Study Is Entwined With Politics,” Advisor One, January 24, 2011). From the get-go, opponents positioned the SEC’s effect to adopt a uniform fiduciary standard in terms of the Congressional budgetary progress (see “SEC fiduciary, SRO studies in congressional limbo,” Investment News, January 26, 2011). Lobbyists honed their checkbooks almost immediately (see “Let the lobbying begin! Industry groups target Capitol Hill in fiduciary clash,” Investment News, February 2, 2011) and Schapiro misplayed her hand by tying the fiduciary standard to increasing the SEC’s budget (see “SEC in no great rush to write fiduciary rule, Schapiro says,” Investment News, February 4, 2011).

As the dust settled in February, it became more apparent the SEC’s stance centered more on getting more money than on doing what’s best for the client (see “SEC’s Fiduciary, SRO Studies Considered Linked, Experts Say,” Advisor One, February 11, 2011). Confirming this suspicion was the eerie silence on the part of the SEC when industry lobbyists began its campaign to thwart the universal fiduciary standard (see “HighTower’s Weissbluth: ‘Choice’ Argument Against Fiduciary ‘Intellectually Dishonest,’” Advisor One, February 7, 2011). When the NY Law School and the Committee for the Fiduciary Standard convened a special meeting, the sides were drawn (see “New York Fiduciary Panel Yields Surprise Honesty While Drawing Lines in the Sand,” Fiduciary News, February 15, 2011). Again, the SEC was nowhere to be seen.

With the SEC in a weakened state, Congressional leaders continued their drip-drip-drip attack, using the poorly argued SEC Fiduciary report as an opening wedge to question the entire Dodd-Frank bill (see “GOP zeroing in on fiduciary study,” Investment News, February 16, 2010). Mary Schapiro, perhaps signaling the stale stubbornness many now see in her boss continued to walk deeper into the Republican trap by linking the fiduciary standard to more money for the SEC (see “SEC Fiduciary Rule May Hit by Summer,” Advisor One, March 1, 2011). Meanwhile, over at the DOL, Phyllis Borzi led a polite but firm hearing on the DOL’s companion effort to broaden the fiduciary standard (see “DOL Fiduciary Hearings: Why 401k Plan Sponsors Need to Pay Attention,” Fiduciary News, March 1, 2011).

While Schapiro focusing on asking for alms from an increasingly recalcitrant Congress (see “GOP opposition mounting to fiduciary duty, user fees,” Investment News, March 15, 2011), at least David Blass, associate general counsel for the SEC, stuck to the main issue (see “SEC’s Blass at IAA: Fiduciary Standard Will Only Be Toughened,” Advisor One, March 11, 2011). Her gambit played out, Congress issued a rather blunt dictate (see “House Republicans to SEC: Halt fiduciary duty rulemaking,” Investment News, March 17, 2011) and used the SEC Fiduciary Report’s partisan vote to attack the credibility of the SEC’s methodology (see “House GOP to SEC: Regulator Lacks ‘Solid Basis’ for Fiduciary Rulemaking,” Advisor One, March 18, 2011). A letter signed by 14 House Republicans exposed the raw politics Schapiro’s broken strategy ignited (see “Republican Congressional Group Questions Uniform Fiduciary Standard,” (On Wall Street, March 21, 2011).

Oddly, again, it was left to third parties to defend the SEC’s own proposal (see “Why Is Congress Asking if We Can Afford to Treat Clients Right?Advisor One, March 22, 2011). Schapiro refused to budge from her “if you want it, you gotta pay me” stance (see “SEC sees fiduciary standards late in 2011-SIFMA,” Reuters, April 7, 2011). In the meantime, Schapiro let the deadline for the vaunted 12b-1 fix slip into eternity (see “Fiduciary Standard: Backdoor Solution to 401k Plan Sponsors’ 12b-1 Problem?” (Fiduciary News, April 14, 2011) Poisoning the well, an administration official admonishes “the SEC is off limits to partisan bickering” then goes on a partisan rant, stoking the fire in an already irate Congress (see “Administration big: Single fiduciary standard needed,” Investment News, April 19, 2011). This occurs even as a popular radio host inadvertently crosses the fiduciary line (see “Glenn Beck reveals fiduciary standard dilemma,” BenefitsPro, April 20, 2011).

Schapiro’s response to this? Use the industry media to cry crocodile tears, revealing only the SEC isn’t treating the fiduciary standard as anything about consumer protection, just a standard procedure involving the usual lobbying and political process (see “Mary Schapiro, SEC: The Extended 2011 IA 25 Profile,” Advisor One, April 25, 2011). Meanwhile the political pressures only increase (see “Will new pressures on Dodd-Frank influence the fiduciary standard?InvestmentNews, May 9, 2011) until they finally get worse (see “Congressional Democrats Want Agencies to Revise Fiduciary Rule,” Accounting Today, May 12, 2011 and “Democrats Blast Proposal to Redefine Fiduciary,” Financial Planning, May 13, 2011).

I could go on…

Schapiro miscalculated. It seems she acted under the mistaken impression she could win her case for more funding by using the fiduciary standard as a hostage for more Congressional funding. Like in O. Henry’s Ransom of Red Chief, Schapiro may find, rather than getting paid, she – or the SEC – will be the one doing the paying. Already Congress and third party SRO’s seemed to taken her up on her “or else” threat (see “Freaky Thursday? Schapiro gives nod to adviser SRO, top Republican endorses more SEC funding,” InvestmentNews, September 15, 2011 and “Congress Urged to Preserve States’ Authority in Any SRO for Advisors,” AdviserOne, September 14, 2011).

In all this horse trading, it looks like we’ve ended up with a diminished SEC, more government spending and, to date, no universal fiduciary standard.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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