Battle lines drawn after SEC backs fiduciary standard

Industry groups swiftly weigh in on the commission's much-anticipated report; some pleased, others less so

Jan 22, 2011 @ 10:14 am

By Mark Schoeff

Anyone providing personalized investment advice to retail customers would have to adhere to a fiduciary standard of care under a recommendation contained in a Securities and Exchange Commission staff report. The SEC study, which was mandated by the Dodd-Frank financial reform law, was submitted to Congress late Friday night.

The report encourages SEC commissioners to write a regulation that would impose a universal fiduciary duty that is “no less stringent” than the one that currently applies to investment advisers. Dodd-Frank allows the SEC to move ahead and write such a rule.

Still, it remains to be seen how the universal implementation of a fiduciary standard would alter the landscape of the advice business.

Currently, broker-dealers must only meet a suitability standard when providing personalized advice about securities to retail investors. But the SEC staff calls for raising the bar by requiring brokers to act as fiduciaries, and thus put their clients' best interests ahead of their own.

Crucial details still have to be worked out.The SEC report suggests that the agency's commissioners engage in rulemaking “and/or issue interpretive guidance” that would define components of a universal fiduciary duty, such as requirements for loyalty, care and disclosure.

Furthermore, two commissioners, Kathleen Casey and Troy Paredes, expressed doubts about the report's conclusion, saying that it was not backed up by rigorous analysis.

“The study should be viewed as a starting point for further research and consideration, rather than as forming the primary basis for rulemaking,” Ms. Casey and Mr. Paredes wrote in a statement. “The study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection.”

Ms. Casey and Mr. Paredes are both Republican appointees to the SEC, which has five commissioners. It is not clear whether their concerns about a universal fiduciary duty will be reflected by Republicans in Congress. Further congressional approval, however, is not required for the SEC to promulgate a fiduciary regulation.

According to the report, a universal fiduciary duty is needed because investors are unaware that investment advisers and broker dealers operate under different standards.

The report argues that harmonizing regulation of various investment advice providers would increase investor protection. (Read InvestmentNews' viewpoint on the fiduciary standard)

To accomplish that, the SEC staff, recommends that the Commission exercise its rulemaking authority under Dodd-Frank Act Section 913(g), to promulgate rules to provide that: “The standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Although the Securities Industry and Financial Markets Association, which represents securities firms, banks and asset managers, has supported a universal fiduciary duty, it also has stressed that such a standard should not undermine broker-dealer business practices.

The Dodd-Frank law states that charging a commission and selling proprietary products are not necessarily violations of fiduciary duty. It also says that broker-dealers would not have a continuing obligation of care after selling a financial product.

The SEC report states that a uniform fiduciary standard would “accommodate different existing business models and fee structures…preserve investor choice” and “not decrease investors' access to existing products or services.”

Many of those phrases echo points that broker-dealer organizations made in comment letters to the SEC. The agency received more than 3,500 letters while working on the fiduciary study.

“It helps foster the debate, discussion and analysis for investors and the wider financial community,” Ira Hammerman, SIFMA general counsel, said of the report.

There's bound to be plenty of discussion, that's for sure. David Tittsworth, executive director of the Investment Adviser Association, which represents registered investment advisory firms, has two concerns about the development of standard-of-care rules.

“First, we will oppose efforts to weaken or water down the well-established fiduciary duty under the (1940) Advisers Act,” Mr. Tittsworth wrote in an e-mail Saturday. “Second, we think it would be a mistake to establish different standards of care for different types of clients.”

Officials at SIFMA, too, have worries about the SEC's report. In a statement, the industry group cautioned the commission to take care “to ensure that the broker-dealer role is not hindered.” In the past, some brokers have warned that a fiduciary standard would force them to dump less profitable clients or adopt a fee-only business model.

SIFMA also believes the SEC must provide clear direction for firms on how to implement the new standard. “It was encouraging to see in the study recognition that there should be written guidance from the commission on how to implement a new universal fiduciary standard,” Mr. Hammerman said in an interview Saturday morning.

The Financial Planning Coalition, however, views the SEC staff's recommendations as a victory. Moreover, the group backs quick adoption of a single standard of care.

“Time is of the essence and we urge the SEC to implement this important consumer reform quickly,” Charles A. Moran, chairman of the Certified Financial Planner Board of Standards, Inc., said in a statement. “The extension of a fiduciary standard of care to all broker-dealers will build much-needed confidence among the average American consumer whose faith in the financial markets is still shaken.”

Quick adoption of a universal standard of care isn't likely, however. “The report and the separate opposing statements by Commissioners Casey and Paredes underscore how controversial these issues are,” Mr. Tittsworth cautioned. “The report certainly provides a basis for future rulemaking by the commission but it is not going to be a smooth and easy road.”

Indeed, the battle over standards of care for advisers and brokers has been raging for years — and may continue for some time. Said Mr. Hammerman: “Now, we're in the third inning of a baseball game that will likely go into extra innings."


What do you think?

View comments

Recommended for you

Featured video


Envestnet Tamarac's Anderson: What's next for fintech?

Envestnet Tamarac is focused on broadening its offerings so it can gather more marketshare and craft more partnerships. Check out what Andina Anderson is examining so the company can do more for advisers.

Latest news & opinion

Morningstar: DOL fiduciary rule reduces inflows to mutual funds with high loads

With the measure's demise, will the SEC's advice reform sustain the momentum?

6 tax strategies for year-end planning

How to help clients maximize their wealth using specific tax strategies before the end of the year.

Ohio National offers buyouts, ends commission trails amid jumbled regulatory oversight of VAs

Jurisdiction is shared between the SEC, Finra and state insurance commissioners. Will any of them step in?

6 mistakes advisers make when onboarding new clients

Starting a new relationship with a client is harder than it looks.

TCA by E*Trade lures Edelman Financial Engines with promise of client referrals

Access to clients through E*Trade's 30 branch offices drew the attention of RIA Edelman Financial Engines.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print