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Brokers Get an Unfair Bad Rap and RIAs Get a Free Pass, Says General Counsel

By Rita Raagas De Ramos September 14, 2018

Brokers have been painted as individuals from whom investors need protection, but they’re getting a bad rap while RIAs get a free pass, says Sifma General Counsel Ira Hammerman.

The now-dead Department of Labor fiduciary rule, the pending SEC Regulation Best Interest and new initiatives being considered by state regulators all meant to raise the requirements imposed on brokers for the protection of investors.

But that’s an unfair assumption because brokers are already under the microscope of regulators and have little room to get away with misconduct, says the Washington, D.C.-based lawyer.

“If you’re really worried about investor protection, I would take greater comfort from a broker who has Finra crawling around, the SEC looking over their shoulder, and who has to have a whole supervisory system with branch managers, compliance, everyone looking at records – questioning, challenging the transactions whether they are retirement transactions or just an everyday trade that a broker enters on behalf of his or her client,” Hammerman says.

In contrast, Hammerman says “there is not a lot of regulatory supervision or oversight of the RIA community.”

And Hammerman includes broker-dealers that are dually-registered as advisors under the umbrella of firms that are heavily regulated.

Morgan Stanley, Edward Jones, Merrill Lynch – those firms are dually registered. They have more regulators crawling over them on any given day than you can imagine,” Hammerman says.

If you’re really worried about investor protection, I'd take greater comfort from a broker who has Finra crawling around, the SEC looking over their shoulder, and who are subject to a whole supervisory system.
Ira Hammerman

“But the RIA community, the SEC doesn’t come in and inspect them – maybe once every 11 years – and there is no Finra oversight, inspection or examination. The RIA community gets to go on its merry way without a whole lot of the regulatory friction; there’s no one really kicking the tires,” he adds.

Hammerman says investors need to understand the difference between how brokers and RIAs are regulated to appreciate that while some may consider best interest standards inferior to fiduciary standards, there is also a significant difference in how these firms or individuals are policed.

“Investors need to understand that it’s one thing for an advisor to say ‘Trust me, I’m a fiduciary,’ but there’s not a lot of checks and balances to what that advisor is doing,” Hammerman says. “When a broker says ‘Trust me, what I’m recommending to you is suitable,’ at least the investor can take comfort in knowing there’s a branch manager, compliance, risk, supervision, Finra exams, exception reports and SEC oversight.”

Thus, even if the SEC’s proposed Regulation Best Interest doesn’t hold brokers to a fiduciary standard, there’s already plenty of oversight to help protect investors, Hammerman insists.

Barbara Roper, Pueblo, Colo.-based director of investor protection at the Consumer Federation of America, agrees there isn’t enough oversight of RIAs.

The SEC’s guidance for advisors in its proposed regulation best interest package is “every bit as weak” as their guidance for their rule for brokers, according to Roper.

“This notion that investment advisors are required always to act in their customer’s best interest and can’t put their interest first, can’t disclose away that obligation just isn’t matched by the reality of how the SEC enforces that standard,” Roper says. “In fact, as long as firms fully disclose that their practices put their interests ahead of their customers’ interests, that satisfies the SEC rule as they enforce it.”

Ira Hammerman

Meanwhile, SEC Commissioner Hester Peirce worries that both the best interest standard for brokers and fiduciary standard for advisors could be mistaken by investors as a seal of approval from regulators.

“A bigger concern for me is that the best interest standard suffers from the same problem the fiduciary standard does – a term that is wonderful for marketing purposes but potentially misleading for investors,” she said at a National Association of Plan Advisors forum in Washington, D.C. last month.

“Just as ‘fiduciary’ has been used to lull investors into not asking questions about their financial professional, so ‘best interest’ runs the risk of becoming a term that encourages investors simply to rely on the fact that their best interest is being taken care of,” she added.