The major lobbying group for large broker-dealers last week urged the SEC to develop a new fiduciary standard that could change from customer to customer and which would be spelled out at the start of an adviser-client relationship.
In a letter last week, the Securities Industry and Financial Markets Association said that while it supports the idea behind the current fiduciary standard — acting in the best interests of clients — it believes the Securities and Exchange Commission should come up with an alternate fiduciary framework that can support the existing business model of most brokers.
Right now, brokers are required to give their clients investment advice that is “suitable,” which is widely considered a lesser benchmark than the fiduciary standard.
Under SIFMA's proposal, the new standard of care would be articulated in a customer agreement at the outset of an advisory relationship. The standard would “apply on an account-by-account basis” and would exempt the charging of commissions or other fees, such as marketing and distribution fees for mutual funds, or revenue sharing.
SIFMA cautioned that the way a fiduciary standard is put in place is critical. The organization warned the SEC not to apply the Investment Adviser Act of 1940 to broker-dealers, because doing so would “negatively impact [consumer] choice, product access and affordability of customer services,” the letter stated. Broker-dealers are exempt from the act.
“We believe that a wholesale extension to broker-dealers of the general fiduciary duty implied under the Advisers Act is not in the best interests of investors and is problematic for the broker-dealer business model,” said the letter, which also laid out guidance on the definition of “retail advice” and on disclosure guidelines.
The Dodd-Frank financial reform law gives the SEC the authority to write a universal-fiduciary-duty regulation that applies to investment advisers and brokers alike. The agency delivered a study to Congress in January recommending such a standard to improve protection of investors and said it would follow up with rulemaking this year.
“The status quo should be over for both the investment adviser and broker-dealer sides,” said Ira Hammerman, SIFMA general counsel. He said the SEC should “roll up its sleeves” and work on a new standard because “they have a lot of latitude to come up with a fresh approach.”
One fiduciary advocate said that disagreements will continue over the details of a fiduciary-duty rule but that SIFMA's letter signals that the idea will maintain its momentum.
“This allows us to fight another day instead of just killing it, which in this political environment, they have the opportunity to do,” said Barbara Roper, director of investor protection at the Consumer Federation of America.
Although SIFMA is in favor of the universal fiduciary standard, “the "how,' of course, is very important,” Mr. Hammerman said.
SIFMA suggested that the SEC “provide the necessary rule-based guidance regarding when the fiduciary duty begins and ends, and what disclosures and consents, if any, are necessary to satisfy the duty” under circumstances where a broker-dealer gives “advice involving principal trading, structured products, hybrid accounts, complex investment strategies, concentrated positions, and receipt of commissions and differential loads for different products.”
The organization also suggests that fiduciary duty not apply to “introductory discussions regarding the nature of the relationship” between a broker and a customer.
DISAGREEMENT
This is a detail on which Ms. Roper disagrees.
“You cannot limit the scope of fiduciary duty through contract,” she said.
David Tittsworth, executive director of the Investment Adviser Association, asserted that the SIFMA letter does not provide any evidence that the current fiduciary duty that investment advisers meet is impossible to adhere to for broker-dealers.
“They are very uncomfortable with the well-established principles-based fiduciary standard under the Advisers Act,” Mr. Tittsworth said. “That's crystal-clear.”
Congress, however, didn't want broker-dealers to live under a fiduciary duty as defined by the Advisers Act, according to the SIFMA letter. The Dodd-Frank law gives safe harbor to the charging of commissions and the selling of proprietary products and a limited menu of products. It also stipulates that broker-dealers don't have a continuing obligation to clients after the sale of a product.
The SIFMA letter reiterates these points because the SEC study did not explicitly say that the SEC should not foist the Advisers Act on broker-dealers, according to Mr. Hammerman.
“Don't let anyone convince you that brokers are trying to water down and have a shortcut to a fiduciary standard,” Mr. Hammerman said. “We need guidance as to how firms can comply with that standard while providing worthwhile services and products that investors need and want.”
E-mail Mark Schoeff Jr. at [email protected].
