SEC's latest on fiduciary: Advisers can customize individual client agreements

Disclosure and informed consent can limit services, allow third-party pay

Dec 19, 2018 @ 4:00 pm

By Mark Schoeff Jr.

When Securities and Exchange Commission chairman Jay Clayton asserted at a congressional hearing last week that investment advisers can "contract around" their obligation to act in a client's best interests, it caused some head scratching in the adviser community.

In response to being pressed by Sen. Elizabeth Warren, D-Mass., about the SEC's investment advice reform proposal, Mr. Clayton said: "Advisers are allowed to contract around this standard; it's not well known. This is something we want people to understand."

The exchange was truncated due to the five-minute limit on questions during the Dec. 11 session of the Senate Banking Committee.

Over the past week, some adviser advocates have had trouble squaring what Mr. Clayton said with a line in the interpretation of the adviser standard of conduct contained in the SEC advice proposal.

"[T]he investment adviser cannot disclose or negotiate away, and the investor cannot waive, the federal fiduciary duty," the interpretation states.

Dalia Blass, director of the SEC Division of Investment Management, on Wednesday elaborated on Mr. Clayton's brief Capitol Hill comments.

"Although the investment adviser fiduciary duty is not waivable, it is long established that the terms of the investment adviser relationship — and therefore the scope of the investment adviser's fiduciary duty — may be shaped by disclosure and informed consent," Ms. Blass said in a statement to InvestmentNews. "This process, including through account agreements and Form ADV, is widely accepted in the industry and provides for arrangements such as limited account services and certain third-party compensation to the investment adviser. The Commission's interpretation, if adopted, will bring greater clarity to these arrangements."

In other words, an adviser and client can contour a relationship in a contract by specifying the services an adviser will provide and outlining potential conflicts of interest.

"This is a very complex area," said Arthur Laby, professor of law at Rutgers University. "It's rather nuanced."

For instance, an adviser and client can agree that the adviser is providing one-time advice.

"If the contract is clear about that, the adviser is not obligated to monitor the account on an ongoing basis," Mr. Laby said.

Highlighting conflicts of interest can get tricky. For instance, what if the adviser discloses that she intends to invest client funds in a business run by her spouse?

"This is complicated," Mr. Laby said. "One person might say the adviser, through disclosure, is contracting away the fiduciary duty, which does not allow conflicted advice. Another might say the adviser is abiding by the fiduciary duty, which requires disclosure of conflicts. So, if the adviser makes disclosure, the duty is satisfied."

Knut Rostad, president of the Institute for the Fiduciary Standard, expressed concern that in its enforcement of fiduciary duty, the SEC is "dumbing fiduciary down" by cracking down on advisers for disclosure failures instead of failures to act in a client's best interests.

"It's the advice, for gosh sakes, not the disclosure" that's important, Mr. Rostad said. "The SEC has to provide guidance on what constitutes real informed consent."

The heart of the SEC's proposal is the so-called Regulation Best Interest, which would require brokers to emphasize their clients' well-being over their own compensation.

The SEC asserts such a standard would be a step up from the current suitability rule that governs brokers. Under the SEC proposal, advisers would continue to adhere to fiduciary duty and be regulated separately from brokers.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

May 16

Conference

Chicago Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

What is causing the fever for RIA deals?

Deputy editor Bob Hordt and senior columnist Jeff Benjamin discuss factors adding fuel to the M&A fire in the independent advice space.

Latest news & opinion

Voya Financial Advisors exposes more sensitive adviser information on its website

List of top advisers at the firm comes after Social Security numbers were put at risk.

Securities America hit with lawsuit seeking $18 million in damages

Firm is dealing with the fallout from a rogue broker it fired a year ago.

Brian Block continues his legal fight to stay out of prison

A judge denied Mr. Block's motion for a new trial, but he wants another day in court.

10 social media stars you're not following yet, but should be

Some of the great people using social media to discuss wealth management and financial advice who might not be on your radar.

Wells Fargo could be putting more of its focus on wealth management

Speculation is mounting that the bank is dumping some lines of business to focus on just a few areas, including financial advice.

X

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 investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

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

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print