January 25, 2012

Halted SEC Rule Good News for Investors

Hester Peirce

Former Senior Research Fellow

In yesterday’s Wall Street Journal, Sarah Morgan writes about a planned SEC rule that could have big implications for investors, many of whom are not even aware a change is in the works. The so-called “uniform fiduciary standard rule” could alter the way in which brokers relate to mom-and-pop investors. The rule, which was expected to be proposed by the SEC in 2011, has been put on hold.

The reason for the delay? Morgan reports that the SEC won’t write any new rules until it studies how much they will cost. This is good news - precisely what we want regulatory agencies to try to figure out. We want regulators to make a good-faith attempt to understand the benefits and costs of rules before they impose them. Investors end up footing the bill for rules like this and they shouldn’t have to bear the costs of a rule that doesn’t benefit them. The article explains that the SEC’s decision to delay the rule comes in the wake of a federal court’s recent decision to reject another SEC rule for inadequate cost analysis.

The court’s decision heightened the SEC’s sensitivity to the concerns expressed about the uniform fiduciary standard rule a year ago by two SEC commissioners. They objected to an SEC staff recommendation to move forward with the rule without first identifying a problem that the rule would solve and assessing the costs of the recommended solution. As the two commissioners wrote at the time, “Before the Commission proposes rules in this area, more rigorous analysis - rooted in economics and data - is needed to avoid unintended consequences.”

Just as you wouldn’t make a big purchasing decision without considering the costs and benefits, it’s important for the government to consider all sides of the issue before adopting a rule that could change the way you interact with your investment professional.