As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission has begun a six-month study of the regulation of brokers under the fair-dealing standard and advisers under the fiduciary standard.
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission has begun a six-month study of the regulation of brokers under the fair-dealing standard and advisers under the fiduciary standard.
As part of this process, the SEC has given the public until Aug. 30 to comment on 13 specific matters that Congress wants to see addressed in the study. Among them is the effectiveness of the existing legal and regulatory standards of care for broker-dealers and financial advisers, gaps in existing regulations, the disparity in the levels of protection provided to investors under the two standards and the potential costs of extending the fiduciary standard to brokers.
Another area of inquiry is open-ended and invites input on “any other considerations” that may assist the SEC in deciding how it should exercise its new authority to extend the fiduciary standard to all who dispense investment advice.
In my view, a primary consideration that the SEC should incorporate into its decision making is the firmly established history within law and society of the fiduciary standard as the essential code of conduct for those who have been entrusted to care for other people's property.
To quote the Greek philosopher Aristotle: “If you would understand anything, observe its beginning and its development.”
In fact, Aristotle, who lived from 384 B.C. to 322 B.C., was one of many who influenced the development of fiduciary principles. He recognized that in economics and business, people must be bound by high obligations of loyalty, honesty and fairness, and that when such obligations aren't required, society suffers.
But Aristotle was far from the first to consider fiduciary duties.
He had the benefit of some 1,400 years of recorded legal history to draw on, since the fiduciary principles trace their roots back to the Code of Hammurabi (circa 1790 B.C.). Hammurabi laid out 282 laws, a number of which demonstrate fiduciary considerations.
Later, the Romans refined and formalized fiduciary law even further, as is evident from this quote from Cicero (106 B.C. to 43 B.C.): “Therefore, legal proceedings for betrayal of a commission are established, involving penalties no less disgraceful than those for theft. I suppose because in cases where we ourselves cannot be present, the vicarious faith of friends is substituted; and he who impairs that confidence attacks the common bulwark of all men and, as far as depends on him, disturbs the bonds of society. For we cannot do everything ourselves; different people are more capable in different matters” (“Oration for Sextus Roscius of Ameria”).
In the evolution of law from Roman times through the present, the fiduciary standard has embodied the core duties of loyalty, due care and good faith (honest intentions, full disclosure and applied diligence).
In modern times, perhaps the most well-known quote capturing the significance of the fiduciary standard and recognizing the sanctity of fiduciary principles is from Judge Benjamin Cardozo's opinion in the Meinhard v. Salmon case, rendered in 1928 when he was a member of the New York Court of Appeals: “Many forms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone but the punctilio of an honor the most sensitive is then the standard of behavior. As to this, there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion' of particular exceptions (Wendt v. Fischer, 243 N.Y. 439, 444). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.”
I hope the SEC will conduct the rulemaking process with the same appreciation for the timelessness of the fiduciary standard as is evident in the quote from Mr. Cardozo, who later served as a Supreme Court justice, and will act in accordance with three key considerations he applied in his decision making:
1. Fiduciary matters demand a higher standard than normal marketplace transactions.
2. Exceptions to the fiduciary standard are a source of “disintegrating erosion” that undermine the duty of loyalty.
3. Whether it is the courts or legislators or regulators, those charged with interpreting, enforcing or modifying the fiduciary standard should not consciously weaken it.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.
