Torrent of comments on fiduciary provision

Among 2,500 responses, B-Ds express concerns

Sep 5, 2010 @ 12:01 am

By Mark Schoeff Jr.

It appears that the SEC will be sorting through its mail for some time.

Last Monday marked the last day that the public could offer comments on whether the Securities and Exchange Commission should adopt a universal fiduciary standard for both investment advisers and broker-dealers — a highly controversial proposition for those in the financial-advice business.

The SEC re-ceived more than 2,500 responses on the topic during the official 30-day comment period. By comparison, the SEC received just 46 comments during its recent 60-day comment period on a proposal requiring enhanced disclosure for target date funds.

Last Monday alone, the SEC received a flood of comments totaling 182 pages. Many of the 11th-hour comments came from opposing interest groups in the advisory business.

Coalitions representing investment advisers, who must adhere to the fiduciary standard, told the SEC that broker-dealers — subject only to a suitability standard — should be held to the more rigorous touchstone.

The Financial Planning Coalition, which comprises the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors, wrote: “The transaction-based suitability standard does not provide nearly the same level of protection as the relationship-based fiduciary standard.”

But associations that represent broker-dealers don't see it that way.

They warned the SEC that holding firms to a fiduciary standard would do serious harm to the broker-dealer business model, which is based on commissions. The higher standard of care, they said, would drive up costs and potentially price out customers who can't afford a fee-based service from an investment adviser.

“Clients of independent financial advisers are typically "Main Street America' — it is, in fact, almost a part of the "charter' of the independent channel,” the Financial Services Institute Inc. wrote in its letter. “The core market for advisers affiliated with [independent broker-dealers] is clients who have tens and hundreds of thousands, as opposed to millions, of dollars to invest.”

The Securities Industry and Financial Markets Association argued that a universal standard could limit a broker-dealer's traditional range of offerings, including “liquidity as principal, proprietary products and advice regarding sophisticated investment strategies ... [and] ancillary services, such as lending, cash sweep arrangements and debit cards, that allow retail customers to satisfy financial services needs with a single relationship.”

SIFMA and other broker-dealer groups urged the SEC to preserve their way of doing business.

“The standard of care should be clearly defined by the SEC and the commission should provide guidance as to how the standard of care can be implemented by broker-dealers and investment advisers, tailored to their respective business models,” SIFMA wrote in its comment letter.


In addition, SIFMA wants to delay the effective date of any new standard of care that the SEC may adopt for brokers who give advice to retail investors.

The broker-dealer community “will need sufficient time to implement training programs and to build systems to comply with any standard of care that is adopted,” SIFMA argued in a footnote at the end of it comment letter.

The FSI, which represents both independent broker-dealers and independent financial advisers, took the middle ground in the fiduciary debate.

“FSI supports the adoption of a clearly stated universal fiduciary standard of care, plainly articulated conduct rules, effective customer disclosures and balanced regulatory supervision efforts,” the group wrote in its letter.

Some fiduciary advocates, however, warned that a welter of new rules defining appropriate conduct might backfire. The Investment Advisers Association, for one, supported a more principles-based approach as the best defense against malfeasance.

“It would be contrary to the interests of investor protection to attempt to define precisely all elements of the fiduciary duty,” the group wrote in its letter.

As reported in the past, groups on both sides of the fiduciary-standard debate launched major campaigns to encourage their members to send comments to the SEC, which has six months to study the fiduciary issue.

The FPC offered a link on its website that provided a sample comment letter that members could personalize. And in an alert to its federal coordinators, the National Association of Insurance and Financial Advisors offered arguments for its members to make in their letters to the SEC.

In its own letter to the SEC, NAIFA asserted that its 200,000 members already rely on word-of-mouth and good reputations to attract customers.

The members, NAIFA noted, see their clients “at places of worship, the school, the grocery store, and as neighbors. Unless there is a relationship of trust, and ethical behavior on the part of the financial professional, there is no way a business can survive.”

NAIFA also reiterated its chief argument — that broker-dealers are already heavily monitored by the Financial Industry Regulatory Authority Inc. and other entities. Adding the “ambiguity” of the fiduciary duty to the mix would constitute regulatory overkill, and, in turn, increase costs, uncertainty and litigation, the group said.

The FPC, however, asserted that a universal fiduciary standard should be based on what's best for investors' wallets, not firms' profit-and-loss figures.

“The commission should not mold the fiduciary standard to accommodate business models with substantial embedded conflicts of interest,” the FPC wrote. “Rather, it should impose a strong and uniform fiduciary standard of care, and then allow clients and the market to determine which business models will succeed under that standard.”

Then again, it is hard to determine which model clients would prefer. In truth, it is hard to tell what investors think about a universal fiduciary standard — or if they even know that different standards of care exist.

As Barbara Roper, director of investor protection at the Consumer Federation of America, noted, individual investor comments to the SEC about standards were swamped by the flood of industry responses.

“A preliminary view of comment letters submitted through the beginning of [the week of Aug. 23] suggests that virtually all letters submitted at that time had come from members of the industry,” she said. “[T]he results suggest that more needs to be done to encourage greater input from investors.”

Jed Horowitz contributed to this story.

E-mail Mark Schoeff Jr. at


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