Kurt Schacht, managing director of the CFA Institute's Centre for Financial Market Integrity, says the timeline on deciding the issues of the fiduciary standard and whether to name a new SRO to regulate RIAs is a low priority on the list of decisions that must be made as part of the massive reforms mandated by Dodd Frank. For instance, Schacht says any decision on regulation of over-the-counter derivatives-institutional instruments directly related to the collapse of Lehman Bros, the bailout of AIG, and the death spiral narrowly averted in the 2008 financial crisis-is expected to be delayed for another year. And the issues affecting independent advisors won't come till after that's settled. Complicating matters, Schacht says, the SEC has said it wants legislation from Congress on the matter of creating a new SRO. Though the Investment Advisers Act empowers the SEC to name the self-regulatory organization that would oversee RIAs, the agency does not want to make the decision on its own, according to Schacht. It's just too big an issue for the SEC to do it without getting a clear mandate from Congress.
How will it all end? This is when I pretend to actually have all the answers. It could be that the tiny Financial Planning Coalition will pull off another victory like it did in 2007, when it won the lawsuit against the SEC to end the exemption of brokers from registering as investment advisor representatives. But I would not bet on that happening. Everyone acknowledges that the investing public cannot have confidence in a system in which RIAs are inspected less than once a decade. A self-funded regulator is the only realistic solution. Giving the SEC more responsibility after it failed to regulate derivatives and failed to find the massive Madoff fraud seems extremely unlikely.
So a self-funded SRO seems the most likely choice, especially given the fact that Wall Street's biggest brokerages are major contributors in Congress and have a strong lobby. That is likely to also mean that the fiduciary standard will be changed from its current form to a form that is more aligned with the interests of Wall Street. It will improve disclosures required by brokers but water down the current interpretation of what it means to be a fiduciary, according to the '40 Act. The 40-year struggle to professionalize financial planning will suffer a serious setback. But that's just a guess.