Carve-outs, contingencies and exceptions

Are brokers winning the battle over a uniform fiduciary standard? Many SEC watchers believe they are, and they are troubled by it. Frankly, so are we. In a letter to the Securities and Exchange Commission last month, nine industry organizations said they are concerned that the agency is moving toward a new fiduciary standard that accommodates the brokerage industry while purporting to provide clarity and protections to investors.

The trigger for the letter was the SEC’s request for information as it prepares a cost-benefit analysis for a uniform fiduciary standard — that is, one that would apply to anyone providing investment advice, be they a broker, adviser or financial planner. Comments for the analysis are due by July 5.

These groups are concerned that certain assumptions in that request reflect the biases of the brokerage industry and would result in a new fiduciary standard that would be less clear-cut and rigorous than the one investment advisers already follow.

That standard is simple and straightforward: Advisers should always act in the best interests of their clients. Surveys have shown that the vast majority of investors believe that this standard already exists under the law for anyone dispensing investment advice, no matter what their title.

However — legally, at least — brokers are governed by a suitability standard that allows them to sell financial products that, while fitting the investor’s overall profile, may not necessarily be in the client’s best interests.

Both advisers and brokers have the Dodd-Frank financial reform law on their side. Dodd-Frank gave the SEC authority to issue a uniform fiduciary standard. It also stipulated that the standard could not be any less stringent than the one investment advisers currently follow.

On the other hand, Dodd-Frank also said that a uniform fiduciary standard could allow brokers to continue charging commissions and selling proprietary products. And it would not necessarily have to subject them to a continuing duty of care or loyalty to a retail client.

In its 72-page request for information for its cost-benefit analysis, the SEC mentions these allowances and also talks about whether disclosing a conflict of interest to investors would be sufficient under a fiduciary standard (instead of insisting that advisers avoid these conflicts).

This has led critics to postulate that the SEC might propose a rule-based fiduciary standard that has so many carve-outs, contingencies and exceptions that it is rendered almost useless — at least for investors. If the idea is to clear up confusion over what an investment adviser’s or broker’s responsibilities are, the SEC is on the wrong track, they argue.

NO DECISIONS MADE

The SEC insists that its critics shouldn’t read too much into the request for information in connection with the cost-benefit analysis. Just because it includes certain scenarios in its request doesn’t mean that it has made up its mind about what form the fiduciary standard will take.

But the devil is always in the details, and these groups are rightly concerned. The process bears watching, especially if it looks like the SEC is more interested in figuring out ways to accommodate those providing advice instead of those receiving it.

The fact is, the SEC may not be able to craft a fiduciary standard that makes everyone in the financial advice industry happy. In that case, it would be wise for the regulator to remember where its primary allegiance should lie — and that is with the investing public.

We reiterate our long-standing recommendation on a fiduciary standard. There is no need to invent a new one. The existing standard followed by investment advisers — to always act in a client’s best interests — should be extended to brokers so investors, once and for all, will have the protections they deserve and which many of them have always assumed they had.

Related Topics: Securities and Exchange Commission