SEC chief: Require brokers to put investors first

(MoneyWatch) MIAMI BEACH, Fla. -- After President Obama in 2009 appointed Mary Schapiro to become the 29th chairman of the Securities and Exchange Commission, she hung a sign in her office with this message: "How does it help investors" This ethos -- conceptually simple if often devilishly complex in its application -- is the lens through which Schapiro views every agency task. 

I interviewed Schapiro after she spoke at the annual seminar of the Securities Industry and Financial Markets Association (SIFMA) Compliance and Legal Society. In her keynote address, she underscored the SEC's mission to protect investors, while balancing the need to create an environment where financial institutions can operate efficiently and contribute to the growth of the U.S. economy.

Her audience was filled with the corporate lawyers and compliance professionals who often spar with the SEC over multi-million dollar enforcement cases. But as another speaker, U.S. Attorney for the Southern District of New York Preet Bhara, noted, the crisis-weary group often faces a no-win proposition: Such executives are often seen as "pariahs" or "tattle-tales" within their companies, when in fact regulators desperately need them to be the gatekeepers of their organizations' ethical standards.

SEC pushes to change money market funds

The problem is that many of these underappreciated attorneys (one of whom is my partner, a member of SIFMA C&L and a moderator of a panel at the seminar,) have to convince the revenue-generators in their firms, who see new rules and regulations as an impediment to making money. Schapiro understands the push-pull of these organizations. Prior to becoming SEC chief, she was CEO of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for the securities industry, and previously served as chairman of the Commodities Futures Trading Commission (CFTC).

So what's the SEC doing to protect ordinary investors these days? Sure, there are lots of enforcement cases that grab headlines (remember that the SEC has no authority to conduct criminal prosecutions, so it can't throw anyone in jail), but in the "what does it mean for investors?" category, there are some interesting things brewing.

For instance, you might have heard about the recent money market-fund brouhaha, which has been a hot topic since the financial crisis. Reserve Primary Fund, the oldest such fund, "broke the buck" in 2008, meaning that the fund's net asset value fell below $1, which in turn caused an investor panic and a run on money market funds. In response, the federal government insured money markets until the crisis subsided.

Schapiro wants to prevent money-market mayhem by beefing up fund-provider capital buffers, and perhaps by implementing a system that would allow the fund's value to fluctuate. The SEC has also improved disclosure requirements for municipal bonds, a market dominated by individual investors.

But the topic that is near and dear to my heart that Schapiro and the SEC are tackling is the concept of applying a fiduciary standard to all financial advisors. "Fiduciary" is a fancy way of saying that an advisor must put your needs first. Investment professionals who aren't fiduciaries (brokers, insurance salespeople) are held to a less rigorous standard, called "suitability." That means anything they sell to customers must be appropriate for them, though not necessarily in their best interest.

Schapiro says that the nuances of suitability and fiduciary standards "puts investors in a terrible situation, where they are forced to parse out complicated legal concepts." As a result, she supports the fiduciary standard. SIFMA also supports the adoption of a uniform fiduciary standard, which puts retail customers' interests first. But many of its constituents are fighting hard to water down the definition in the name of preserving "customer choice of and access to financial products and services."

To wrap up, I asked Schapiro what questions investors should ask potential advisors or brokers. She encourages everyone to conduct background checks on the SEC and FINRA websites or the site of the North American Securities Administrators Association (a group of state-level securities regulators), as well as the Certified Financial Planner Board of Standards site. She also warned that before purchasing any financial product, investors should ask how it might perform in a variety of market conditions. Of course, she advises asking how the professional is compensated and adds a final, and vital, caution: "Never buy anything you don't understand."