Advisory panel calls on SEC to move fiduciary duty to front burner

Bloomberg News

A Securities and Exchange Commission advisory panel called on the SEC to move forward with a rule that raises investment-advice standards for brokers.

In a voice vote, the SEC Investor Advisory Committee approved a recommendation that the commission promulgate a rule that would require brokers to act in the best interests of their clients when providing retail investment advice. That would subject brokers to the same standard that investment advisers meet.

The Dodd-Frank financial reform law gave the SEC the authority to impose a uniform fiduciary duty for retail investment advice. But it isn't a mandatory rule, and the SEC hasn't indicated when or whether it will propose a rule.

The SEC is conducting a cost-benefit analysis of the market impact of a potential regulation.

“What we're doing here is saying, 'Please move this to the front burner,'” said Darcy Bradbury, managing director and director of external affairs at D.E. Shaw & Co. “Of all the things in Dodd-Frank, this needs to get going.”

SEC Chairman Mary Jo White said that the commission will take into account the panel's recommendation in its deliberations on fiduciary duty.

“I think this is a very important issue myself,” she told reporters on the sidelines of Friday's meeting. “This committee's recommendations are very important to us.”

The panel comprises 21 members, including financial industry officials, academicians, consumer advocates and state regulators. It was established by the Dodd-Frank law to represent the interests of small investors.

In a separate voice vote on Friday, the committee recommended that the SEC seek federal legislation that would allow the commission to levy user fees on advisers to fund their examinations.

The panel said that such a bill, which has been introduced by Rep. Maxine Waters, D-Calif., would bolster SEC resources for adviser oversight, a problem that it said is urgent. The SEC annually examines only about 8% of the nearly 11,000 registered advisers.

The committee's fiduciary-duty recommendation gives the SEC two options for writing a rule. The method that the panel prefers is for the SEC to craft a rule based on the Investment Advisers Act of 1940, which governs how advisers operate.

Using the adviser law ensures that brokers would be held to the same level of care, said Barbara Roper, director of investor protection at the Consumer Federation of America and chairwoman of the subcommittee that wrote the recommendation,

“If you approach it this way, then you have, by definition, met the standard that's set in Dodd-Frank, that it's no less stringent than the existing standard and that it's the same for brok! ers and advisers,” she said.

The broker-dealer community opposes this approach.

The Securities Industry and Financial Markets Association supports a uniform fiduciary-duty rule but wants the SEC to craft a new one that isn't based on court precedents set under the 1940 law. In an October letter to the SEC, SIFMA said that the commission should use as its starting point the Securities Exchange Act of 1934, which sets rules for brokers.

The organization resists removing the broker exemption from the 1940 adviser law, which the Investor Advisory Committee recommendation would do. In its letter, SIFMA said that such a move would prevent brokers from conducting retirement and investment planning and would be “grossly anti-competitive and unfair.”

The committee also recommended a way for the SEC to propose a uniform fiduciary duty rule under the 1934 law, as long as it includes “an enforceable, principles-based obligation to act in the best interests of their customers.”

Fiduciary advocates say that consumers are confused by the different advice standards that govern advisers and brokers. Advisers must act as fiduciaries, while brokers meet a lower suitability standard when selling investment products.

JPMorgan, Justice Dept. reach $13B settlement

Banking giant JPMorgan Chase Tuesday finalized a record $13 billion settlement of multiple investigations over toxic mortgage investments like those that helped spark the 2008 financial crisis.

The agreement announced by the U.S. Department of Justice and state officials in New York includes a statement of facts in which the nation's largest bank admitted it knew that residential mortgage-backed securities it marketed did not comply with underwriting guidelines and weren't appropriate for sale.

The settlement does not absolve the bank or its officials from potential criminal charges, the Justice Department said.

The penalties total more than half the $21.3 billion the bank reported in 2012 net income — and mark the largest government settlement ever paid by a single U.S. company. The agreement also ends civil, mortgage-related probes that dealt another embarrassing black eye to the strongest bank survivor of the financial crisis, and to its CEO, Jamie Dimon.

Under the deal, JPMorgan agreed to pay $9 billion to settle federal and state civil claims by various entities related to the mortgage securities. That includes a $2 billion penalty to settle Justice Department claims.

The bank will pay the remaining $4 billion in the form of relief to aid consumers harmed by the unlawful mortgage actions of JPMorgan and two subsidiaries it acquired during the crisis: investment bank Bear Stearns and failed bank Washington Mutual. The relief will come via principal forgiveness, loan modification and efforts to reduce blight.

Included in that portion of the settlement is a nearly $300 million payment to California for misleading mortgage securities information JPMorgan gave to the state's public employee and teacher pension funds between 2004 and 2008.

An independent monitor will be appointed to oversee JPMorgan's compliance with the deal.

JPMorgan shares closed up 41 cents at $56.15 in Tuesday trading.

"Without a doubt, the conduct uncovered in this investigatio! n helped sow the seeds of the mortgage meltdown," said Attorney General Eric Holder. "JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm's behavior."

The deal "will bring long-overdue relief to homeowners around the country," said New York Attorney General Eric Schneiderman,who led a federal-state consortium on the case.

JPMorgan, which last month disclosed it had set aside $23 billion in litigation reserves for this settlement and other litigation, pledged complete delivery of promised mortgage forgiveness and other relief to injured borrowers before the end of 2017.

"We are pleased to have concluded this extensive agreement ... and to have resolved the civil claims of the Department of Justice and others," said Dimon, whose bank planned a conference call later Tuesday to discuss the settlement and related issues.

John Coffee, a securities regulation expert at Columbia Law School in New York, said the financial penalties appeared to signal "a new toughness" at the Department of Justice since a 2012 case involving HSBC. Prosecutors drew criticism for not seeking a criminal indictment of the London-based global bank over charges it ignored possible money laundering. Instead, HSBC paid $1.9 billion under a deferred prosecution deal later approved by a judge.

"I think there has been a remarkable shift at the Department of Justice in the last several months," said Coffee.

The agreement could serve as a template for federal prosecutors' future actions with other banks, said Carl Tobias, a University of Richmond law school professor.

The deal follows billions of dollars in other settlements reached by JPMorgan in recent months. That includes a tentative $4.5 billion settlement announced Friday with 21 major institutional investors over mortgage-backed securities sold to them before the financial crisis.

That agreement covered mortgage-back! ed securi! ties trusts issued between 2005 and 2008 by JPMorgan and Bear Stearns, the investment bank and brokerage it acquired during the financial crisis. Similar securities sold by Washington Mutual were not included, however.

JPMorgan also admitted wrongdoing and was fined more than $1 billion to settle investigations by five oversight agencies of the bank's "London whale" trading debacle. The bank initially asserted the trades, which racked up $6.2 billion in losses, had been a hedge against risk. But the strategy instead became proprietary trading for JPMorgan's benefit that was partly funded with federally insured deposits.

A securities class-action lawsuit filed by shareholders over the London whale case is among several pending legal actions faced by the bank. The public employee pension funds serving as lead plaintiffs in that case allege they lost as much as $52 million based on JPMorgan's conduct.