Five Core Fiduciary Principles Attract SEC and Treasury Interest

uphold the authentic fiduciary standard in new legislation. This editor is a member of the Committee.

SEC Commissioner Elisse B. Walter and SEC Commissioner Luis A. Aguilar held meetings with members of the Committee for the Fiduciary Standard at the SEC's offices in Washington DC on July 29. The Committee also briefed Congressional staffers and a Treasury official.

The officials asked the Committee to discuss how the five core principles would apply in differing circumstances and to explore the stark differences between the authentic fiduciary standard and a lower, "commercial" or "arm's length" standard.

The five core principles are:
? Put the client's best interests first;
? Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
? Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
? Avoid conflicts of interest; and
? Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

Harold Evensky, a Committee member who attended the Washington meetings, and president of Evensky & Katz, a registered investment adviser, noted that, "We felt strong interest from everyone we met. Although no specific commitments were made, our takeaway was that all participants understand and believe in the application of the five core fiduciary principles to any and all who provide (or purport to provide) investment advice."

Since announcing the five core fiduciary principles and calling on Congress to adopt the authentic fiduciary standard on June 29th, the Committee for the Fiduciary Standard has:

  • Urged investors, professionals and all interested market participants to 'vote' in support of the five core fiduciary principles by signing the Committee's online petition
  • Invited two leading securities attorneys to debate how Congress can best put investors' interests first. (The invitation was declined.)
  • Met with staff members of the House of Representatives Committee on Education and Labor to provide assistance on HR 2989, a Bill intended to introduce a fiduciary and fee disclosure requirements for those who give advice to retirement plan participants.
  • Met with SEC Commissioners Walter and Aguilar
  • Met with Congressional staffers and a Treasury official

"We saw Washington at its very best. The keen sense of the vital role of the fiduciary standard, and the historic opportunity to 'do what's right for investors' were palpable in our meetings," according to Knut A. Rostad, Chair of the Committee and the Regulatory and Compliance Officer at registered investment adviser Rembert Pendleton Jackson.

The SEC and Treasury Department are continuing their work on re-regulation of financial services. One important leg of the re-regulation proposed in the Obama administration's white paper, sent to Congress on June 17th, is the mandate that the SEC be empowered to "Establish a fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisers and broker-dealers."

The Obama white paper calls for a duty of fiduciary loyalty for all who give investment advice, whether they are an investment advisor or broker, and to bring "consistency to the regulation of these two types of financial professionals." How best to do that is being intensely discussed.

At the heart of these discussions is the issue that, particularly over the last decade, the role of many broker/dealer registered representatives has changed; many B/D representatives now provide financial and investment advice to individual investors--the same kinds of activities as investment advisors. But, investment advisors are bound by the fiduciary duty to put their client's interests first, while broker/dealer representatives are governed by a lower, suitability standard--and do not have to put client's interests first, as by Commissioner Luis Aguilar pointed out in a May 7th speech on investor protection. Indeed, broker/dealer representatives must put their firm's interests ahead of their customer's interests.

Some investment advisors fear that because Commissioner Walter and SEC Chairman Mary L. Schapiro spent years at the NASD, now the Financial Industry Regulatory Authority (FINRA), they might be more inclined to adopt the FINRA self-regulatory model. One major concern for investment advisors is if the standard of care for all advice givers was unified down to a lower standard of conduct that would accommodate B/D suitability--rather than raising the standard of care for all advice givers up to the current fiduciary duty of loyalty to clients that investment advisors must deliver.

Another concern for investment advisors is specter of being brought under the FINRA self-regulatory umbrella--thereby being "regulated" by the brokerage industry. But the tone of Chairman Schapiro's and Commissioner Walter's speeches has changed in recent months, from a general call for uniform standards for all financial professionals who provide advice to the investing public, to speaking in strong terms in favor of fiduciary standard for all advice givers.

Kathleen M. McBride (kmcbride@wealthmanagerweb.com) is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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