Several organizations backing higher standards for retail investment advice are urging the Securities and Exchange Commission to require brokers to act in the best interests — rather than formulate a different approach to fiduciary duty.
The recommendation puts them in conflict with the Securities Industry and Financial Market Association, which last year called on the SEC to create a new fiduciary-duty standard if the agency exercises its authority under the Dodd-Frank financial reform law to impose a universal standard of care.
SIFMA is concerned that applying the fiduciary-duty requirement to brokers would threaten commissions and product sales.
The coalition of pro-fiduciary trade groups used SIFMA's July 2011
letter to the SEC as the jumping off point for the framework it outlined in its own March 28
letter to SEC Chairman Mary Schapiro.
“[T]he goal in writing the new rules should be to extend the existing Advisers Act standard to brokers, while clarifying its applicability in the context of broker-dealer conduct, rather than to replace the Advisers Act standard with something new and different,” states the letter. The letter was signed by the Consumer Federation of America, Fund Democracy, AARP, the Certified Financial Planner Board of Standards Inc., the Financial Planning Association, the Investment Adviser Association and the National Association of Personal Financial Advisors.
Those groups and SIFMA both favor universal fiduciary duty for investment advice. But they diverge sharply on the details.
“There isn't a need for a new articulation; the existing fiduciary standard is not broken,” said David Tittsworth, executive director of the Investment Adviser Association. “I think there is a way forward. I hope the letter will bridge the very wide differences in our respective positions.”
SIFMA maintains that if the implementation of fiduciary-duty is flawed, only fee-based guidance would be viable, increasing the cost of advice and driving middle-income investors who rely on brokers out of the market.
“We support a uniform fiduciary standard of conduct that increases protection for individual retail investors receiving personalized investment advice while preserving investor choice,” Ira Hammerman, SIFMA senior managing director and general counsel, said in a statement. “We believe our framework offers the optimal path forward for regulators to establish a new standard in line with what Congress wrote in the statute. “
In their letter, the fiduciary advocates asserted that SIFMA selectively read case law when it told the SEC last summer that fiduciary duty would prohibit conflicts of interest, such as selling proprietary products. A full reading, the advocates maintain, shows that conflicts must be disclosed and managed.
“In short, SIFMA appears to have scoured the record and found nothing in the existing rules, case law, guidance or other legal precedent that suggest that the existing Advisers Act fiduciary standard cannot be appropriately applied to brokers' transaction-based business model,” the March 28 letter states.
The coalition also takes issue with SIFMA's assertions that fiduciary-duty precedent forbids the charging of commissions, the sale of proprietary products and the sale of products from a limited menu. The Dodd-Frank law states that those activities are not necessarily breaches of fiduciary duty.
“Not only are these issues expressly dealt with in the legislation, but these practices are already engaged in by practitioners who are dually registered as brokers and investment advisers and thus are subject to the Advisers Act fiduciary duty, a fact which ought to offer conclusive proof that SIFMA's concerns are unfounded,” the letter states.
SIFMA suggests in its
fiduciary framework that the new standard of care be articulated in a customer agreement at the outset of an advisory relationship and apply on an account-by-account basis.
“The goal should be to provide general guidance that would clarify brokers' obligations without adopting a check-the-box approach that would undermine the principles-based protections afforded by the fiduciary duty,” the March 28 letter counters.
For now, the SEC is delaying a fiduciary duty proposal until after it conducts a cost-benefit analysis of a potential rule.
Meanwhile, SIFMA is pushing another hot-button issue — establishing a self-regulatory organization for investment advisers.
“We call for a uniform standard of oversight and enforcement through the creation of a new SRO for RIAS, which we view as a natural and necessary component of a new uniform fiduciary standard,” Mr. Hammerman said.
A draft SRO bill has been unveiled in the House but has virtually no prospect of Senate approval.
