If the Securities and Exchange Commission's eventual fiduciary-standards proposal focuses on disclosure of conflicts of interest rather than avoiding them, the whole concept of fiduciary duty will be undermined, a leading fiduciary-duty advocate asserts.
The SEC's request for information — issued March 1 — is designed to elicit data for a cost-benefit analysis of a potential rule that would require brokers to act in the best interests of their clients — an obligation that investment advisers already meet. Currently, brokers adhere to a less stringent suitability requirement.
The request is framed by several guidelines about how a uniform fiduciary standard for retail investment advice would work. That worries Knut Rostad, president of The Institute for the Fiduciary Standard.
“Proceeding on the basis of these assumptions would be horrific for investors,” Mr. Rostad said.
Last week, his organization penned a seven-page paper arguing that the parameters the SEC suggests “focus … on disclosing conflicts at the exclusion of avoiding conflicts” and “imply that disclosure is clearly superior to avoiding conflicts as an investor protection measure.”
“These assumptions sharply restrict when fiduciary duties are applied to brokers or advisers rendering investment advice,” the paper states. “If these assumptions are adopted in rule making, fiduciary duties will be effectively removed.”
The paper notes that the Dodd-Frank financial reform law, which gave the SEC the authority to propose a uniform fiduciary standard for investment advice, indicates that a proposed rule should be “no less stringent” than the Investment Advisers Act of 1940.
The SEC's information request document falls short of that mark, according to the institute.
“Together, these assumptions represent a profound departure from the Advisers Act,” the paper states.
But several of the SEC guidelines reflect Dodd-Frank language.
For instance, the information request document says that a uniform standard would allow brokers to continue charging commissions and selling from a menu of proprietary products, and would not subject them to a continuing duty of care or loyalty to a retail client.
Another assumption in the SEC release is that the application of the standard of care could be determined in a contract.
“The uniform fiduciary standard of conduct would apply within the context of the scope of services agreed to between the customer and the broker-dealer or investment adviser, and would not generally require the broker-dealer or investment advisers to provide services beyond those agreed to through a contractual or other arrangement or understanding with the retail customer,” the SEC release states.
Throughout the request for information, the agency reiterated that it was not bound by the fiduciary model it outlined.
“To be clear, the discussion of these potential approaches — including the identification of particular assumptions or alternatives — does not suggest our policy view or the ultimate direction of any proposed action by us,” the SEC release states.
But that disclaimer doesn't assuage Mr. Rostad. He is calling on new SEC Chairman Mary Jo White to reject the assumptions outlined in the information request document.
“We intend to meet with her,” Mr. Rostad said.
The deadline for responding to the SEC request for information is July 5.