What the Uniform Fiduciary Standard Will Not Be

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Tim Ryan, CEO of the Securities Industry and Financial Markets Association (SIFMA), spoke on Oct. 26 at the City Club of Washington on the implementation of Dodd-Frank.

Ryan laid out the issues at the top of SIFMA’s list regarding Dodd-Frank, the “SIFMA Seven.” They are: systemic risk, resolution authority, derivatives, securitization and the credit rating agencies, capital/liquidity, Volker (Proprietary Trade and Private Equity), and the IA/BD fiduciary standard issue.

As to the fiduciary standard issue, I queried Ryan after his speech about relying on disclosures to address conflicts when a mountain of evidence suggests disclosures often don’t work. In his candid reply to my questions, Ryan was very conversant on the topic.

Ryan stated matter-of-factly that the “uniform” fiduciary standard that the Securities and Exchange Commission (SEC) is working on will not be the fiduciary standard under the Advisers Act of 1940, because, he opined, we have to have a standard that will “work for everyone.” He then spoke about recently attending a SIFMA meeting of experts on disclosures who apparently were tasked with coming up with disclosures that clients can understand.

I emailed a SIFMA spokesperson for more information on this meeting; the prompt reply stated: “We don’t discuss private meetings.”

Ryan seemed impressed with the SIFMA experts’ knowledge on the topic, and then talked about how important it is that disclosures be clear and short, and not like the “fifty pages” of disclosures in a mortgage contract. When pressed on the research concluding how often disclosures do not work, and may even be harmful, Ryan commented that short and clear disclosures should be understandable.

Putting aside for a moment the entire issue of the appropriate role for disclosures in addressing conflicts, and the fiduciary requirement to not delegate the advisor’s responsibility to a statement – regardless how clear and short – there is some potential good in what SIFMA appears to be doing.

First, SIFMA seems to acknowledge the status quo disclosure regime is ineffective. This is good. Second, if SIFMA is seriously working on reengineering the disclosure regime (with outside “experts”) that may work more effectively, this is also good.

However, these first two points will matter only if there is also a fundamental acknowledgement of investors’ – and thus disclosures’ – limits. This acknowledgement is consistent with the massive scale of investor misunderstandings regarding advisory and brokerage services that almost no one seriously questions today. It is also personified in SEC Commissioner Elisse Walter’s observation that investors should not be expected to understand the legal differences between brokers and advisors. The acknowledgement is that disclosures must be viewed as presumptively ineffective, and bare the burden of proving otherwise before being deemed appropriate. This requirement logically connects the SEC’s investor protection mission with its traditional reliance on disclosures.

Recent opinion polling suggests there is a fundamental and unsettling change taking place in the American mind. It is that many Americans no longer believe the future will be better than the present. They question the foundation of the American dream, and have virtually no faith in Wall Street or Washington. Applying the fiduciary standard consistent with legal precedent to benefit investors can, in a small way, help reverse this larger trend. This is the only way the fiduciary standard will, as Tim Ryan says it must, “work for everyone.”     

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