Mary L. Schapiro

Bloomberg has a story today about a former Securities and Exchange Commission official who left the agency to work as a securities lawyer, and the cozy relationship she maintained with her former employer. It's a long read, and a good one, reported out of FOIA'd emails between SEC employees and former agency commissioner Annette Nazareth—leaning on those emails to lift the curtain on the revolving-door phenomenon in which financial regulators leave government service for more lucrative work in service of financial firms.

The part that caught our eye concerns emails between Ms. Nazareth and David Becker, SEC general counsel and senior policy director in July 2009, and appear to concern Dodd-Frank's specification for a uniform fiduciary standard to govern the behavior of broker-dealers and investment advisers.

We reported on the stalled rule-making on the uniform fiduciary standard last month, noting a lack of progress despite the stated desire of consumer advocates and groups representing both broker-dealers and investment advisers to get a new rule hammered out.

READ MORE: Broken Brokerages: Finance Luminaries Join Fight Over Uniform Fiduciary Standard

At the time of the correspondence, Ms. Nazareth's law firm, Davis, Polk and Wardwell, had been hired by the six largest U.S. banks, the Securities Industry and Financial Markets Association, or Sifma, to serve as outside counsel on the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Ms. Nazareth was writing to Mr. Becker to share her thoughts on the U.S. Treasury's draft of the bill. From Bloomberg:

... on July 11, Nazareth e-mailed Becker to offer “just some Saturday morning thoughts” about the Treasury Department’s draft of the regulatory bill, noting that she found it “very peculiar in places, causing me to believe that it was not written by the SEC or fully vetted.”

That included a section of the legislation concerning whether brokers should have a fiduciary duty to their clients. Sifma was fighting to make sure brokers weren’t covered by the same requirement as investment advisers.

“The language is broad enough to suggest that any compensation creates a conflict of interest,” Nazareth wrote. “Are these services now going to be provided for free?”

Becker responded that the draft was left vague on purpose, to give the SEC the authority to set the rules itself, rather than have Congress do it. Still, he told Nazareth: “This has been unbelievably messy.”

We're not sure where to find the draft of Dodd-Frank that Ms. Nazareth was commenting on—if you know, let us know—but we do notice that the final draft of the financial reform law included language protecting broker-dealers' commissions-based model, while at least one earlier draft of the bill—dated July 22, 2009, by the Law Librarians Society of Washington D.C.—did not.

(Here's the language from the law that took effect in July 2010: "The receipt of compensation based on commission or other standard compensation for the sale of securities shall not, in and of itself, be considered violation of such standard applied to a broker or dealer. Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.")

There's no making a mountain of a molehill here—in our reporting on the fiduciary standard, we didn't come across any zealots in the RIA community who wanted to bar broker-dealers from charging commissions outright.

Meanwhile, it's the note from Mr. Becker to Ms. Nazareth that really grabbed our interest. We don't want to read too much into five words taken without full context, but in light of the stalled rule-making process, it's interesting to note Mr. Becker's early assessment. Despite SEC Chairman Mary L. Schapiro's stated support for a uniform standard, could it be that the agency always viewed reconciling broker-dealers and RIAs under one regulatory regime as an "unbelievably messy" prospect?

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