More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
As the Securities and Exchange Commission (SEC) heads into finalizing its study on advisor and broker obligations—the SEC must submit its final report to Congress by February—academics, lawyers and industry executives gathered at the Fiduciary Forum in Washington on Friday to explore the fiduciary standard in a brokerage setting.
The Forum, presented by the Committee for the Fiduciary Standard, the CFP Board, the Financial Services Institute (FSI), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), was designed to bring together “a range of views” on the fiduciary standard discussion, said Knut Rostad, chairman of the Committee for the Fiduciary Standard, in an interview.
“We hope the discussions today will provide useful insight” to the SEC as it finalizes its study and moves into the rulemaking process. Rostad said one of the main arguments that brokers have made is that “disclosure” can be a “substitute” to brokers adhering to a fiduciary duty. Brokers have put a “huge emphasis” on disclosure as adequate investor protection. “I think that’s off-base.”
Indeed, Robert Prentice, chair of the Business, Government & Society Department of the McCombs School of Business, University of Texas at Austin, said during his presentation that many studies have shown that mandated disclosure is ineffective to propel securities professionals to act in the best interest of their clients.
“Unfortunately, for a variety of reasons, lawmakers and regulators seem to default to disclosure as the key remedy for even the most dramatic ills of the financial and securities systems,” Prentice said.
Another participant at the Forum, Mercer Bullard, a former SEC staff attorney who’s an associate professor of law at the University of Mississippi School of Law, told attendees that it would be “a mistake for the SEC’s fiduciary study to focus on specific standards of conduct, in part because the fiduciary duty is inherently principles-based.” Bullard, who also founded Fund Democracy, went on to say that “the frequent complaint that the fiduciary duty should be imposed only if it can be defined as a set of conduct rules misunderstands the principles-based nature of the fiduciary duty.”
Marilyn Capelli Dimitroff, president of Capelli Financial Services, and 2009 chair of the CFP Board’s Board of Directors, agreed that that the SEC should not “water down” the fiduciary standard into a set of rules. And despite complaints to the contrary, the fiduciary standard “can be followed by a variety of business models,” she said.
Arthur Laby, associate professor of law at Rutgers University and a former assistant general counsel at the SEC, said during his remarks that he hoped the SEC “takes this study [of putting brokers under a fiduciary standard] seriously.” However, he said, the SEC “should recognize that the study and rulemaking are separate. …the SEC should not link the two too closely.” The study should be used to help determine how laws can be revised to help better serve investors, he said.
The SEC could have addressed the fiduciary “conundrum” much earlier, Laby said, particularly in the 1980s and 1990s when brokers started referring to themselves as advisors.