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Debate over fiduciary duty heats up

At a House Financial Services Committee hearing tomorrow, the Securities Industry and Financial Markets Association will present its version of a fiduciary standard.

SIFMA’s proposal, which it claims is more stringent than the current standard, comes with a caveat — that it only be applied to brokers when they provide personalized investment advice, not when they sell securities.

Currently, brokers are regulated by the Financial Industry Regulatory Authority Inc. under standards that require them to make suitable recommendations to their clients. By contrast, investment advisers, who are regulated by the Securities and Exchange Commission and state securities regulators, are held to a fiduciary standard that requires them to put their client’s interests above their own.

Advocates for advisers want the existing fiduciary standard applied to all financial professionals who give investment advice.

The Obama administration in July proposed legislation that would require brokers and advisers who give advice to “act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.”

But SIFMA says its standard exceeds that in the bill by requiring both registered investment advisers and brokers giving investment advice to “act in the best interest of their clients and place the interests of their clients before their own.”

The battle over the legalese is significant.

SIFMA, as well as adviser and consumer groups, contend that the Obama administration’s definition of fiduciary care would weaken the existing definition of a fiduciary as it applies to investment advisers.

Specifically, SIFMA is worried that the use of the word “solely” would be confused with the definition of a fiduciary as it applies to the 1974 Employee Retirement Income Security Act, which requires fiduciaries to act “solely” in the interest of plan participants.

“That language probably needs to go,” said Kevin Carroll, SIFMA’s managing director and associate general counsel.

“We don’t want confusion or overlap with other fiduciary standards. The “best interest’ is really traditional fiduciary formulation, and we support that,” Mr. Carroll said.

Last week, House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., released a draft bill requiring that advisers act in the “best interest” of their customers. The Capital Markets Subcommittee is part of the House Financial Services Committee.

No matter how the standard is defined, critics contend that allowing brokers to don and doff their fiduciary caps is harmful to clients.

“There’s no way that someone who experiences the trust and reliance that triggers fiduciary duty is going to shed that sense of trust when they place the order,” said Mercer Bullard, founder and president of Fund Democracy Inc., who will also testify at the hearing.

“Wearing different hats can be incredibly confusing to investors,” said David Tittsworth, executive director of the Investment Adviser Association, who also is slated to testify.

Another point on which advisers and brokers disagree is whether the new fiduciary standard should be precisely defined by the Securities and Exchange Commission.

Currently, fiduciary standards are based on case law on a state-by-state basis, Mr. Carroll said.

Such a piecemeal system “does not appropriately promote investor protection,” he wrote in an e-mail.

Mr. Tittsworth disagrees.

“It’s no more appropriate to insist on a precise definition of “fiduciary’ duty than it would be to insist on a precise definition of “the duty not to commit fraud,’” he said.

Adviser groups have wrangled with the SEC over broker-adviser standards for years, culminating in the 2007 federal appeals court victory by the Financial Planning Association in overturning an SEC rule that would have exempted fee-based brokers from registering as advisers.

The fear is that the SEC may weaken the fiduciary standard. “This is the same SEC that proposed the Merrill rule,” Mr. Bullard said in a reference to that case.

Such criticism ruffles the SEC.

“We are interested in seeing a strong fiduciary standard applied across the board,” said commissioner Elisse Walter. “Nobody’s talking about dilution” of the fiduciary standard, she said.

The draft legislation released by Mr. Kanjorski last week would require the SEC to issue rules requiring advisers to abide by fiduciary standards. John Taft, head of RBC U.S. Wealth Management and chairman of SIFMA’s private-client group, will present SIFMA’s position at the hearing tomorrow.

No one from the SEC is expected to appear.

E-mail Sara Hansard at [email protected].