The Brokerage Industry’s “Muddle” Strategy

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July 4 reminds us of how the American experiment started. That stands in startling contrast to the SEC’s experimental standards.

The rule-making standards the SEC set on June 5 was transformational. Broker-dealer (BD) sales rules replaced investment advisor fiduciary duties on the federal throne, regulating “trusted advice” for retail investors. It’s a clear power shift, years in the making, and BDs are energized. They’re wasting no time brandishing their new ascendency over RIAs.

Take John Taft, vice chairman of Baird and former chair of the Securities Industry and Financial Markets Association (SIFMA). He’s the architect of SIFMA’s July 2011 blueprint for a best interest standard and a seasoned Washington lobbyist. Taft wrote in Investment News that brokers must, “mitigate and in certain cases eliminate” financial conflicts and that “this is truly a best-interest standard with real teeth.”


Mitigation is not required by the rule. BDs are required to have policies to identify if conflicts merit mitigation. Yet, actual mitigation is only called for if, and only if, the BD itself finds it is appropriate.

Or, take Paul Reilly, CEO of Raymond James, who spoke on Bloomberg last week. About Reg BI, Reilly stressed, “First make sure it’s very clear what the costs are and what you are paying and you disclose all fees and compensation so there is no doubt [for] both the advisor and the firm.” He then reiterated the misconception about mitigating conflicts, “Conflicts should be mitigated and disclosed and we are all in favor of that.”

Wrong. Wrong.

He makes the same error on mitigation. On costs and fees, his statement follows many other similar statements from the SEC over the past year. Reg BI adherents wrongly say fee disclosure is required. It’s not. The release itself argues against it. What the rule calls for is a price list of services.

Then Reilly turns to RIAs and fee-only compensation. “There is a misunderstanding that fee-only means you’re a good advisor,” he said. “Madoff was an RIA. So just because you’re an RIA doesn’t mean everything is perfect.”

Finally, take Ken Bentsen, CEO of SIFMA. In a letter to the members of the House, Bentsen writes, “Conflicts cannot be satisfied by disclosure alone. Brokers must also have practices and policies to mitigate or eliminate financial conflicts. The new Reg BI standard is both equivalent to and in certain provisions exceeds what’s required of by the Investment Advisers Act of 1940.”

Wrong. Wrong. Misleading.