More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
While Congress returns on Wednesday for its 112th session, the advisory industry will be anxiously anticipating the reports that the Securities and Exchange Commission (SEC) will hand to Congress by Jan. 21 on fiduciary duty and enhanced advisor oversight. As the deadline approaches, industry groups are voicing their concerns about what an SEC-crafted fiduciary standard may look like.
For instance, the Committee for the Fiduciary Standard fears the SEC will institute a “disclosure-based” standard for brokers instead of a fiduciary standard, while the Investment Adviser Association (IAA) says the SEC “defining” fiduciary duty is a big worry.
Recent meetings the Committee for the Fiduciary Standard has had with the SEC as the agency was completing its study of the regulation of brokers and investment advisors prompted the Committee to shoot off a Jan. 3 letter to the SEC imploring the securities regulator to not adopt a disclosure-based standard. “Disclosure of conflicts, as opposed to avoidance or mitigation of conflicts, has become the central battlefield over whether the fiduciary standard survives,” Knut Rostad, chairman of the Committee for the Fiduciary Standard, told AdvisorOne. “The securities industry is pressing very hard for a casual disclosure-based standard that would, effectively, remove fiduciary duties when material conflicts are present.”
Rostad told the SEC in his comment letter that "modern research has provided overwhelming evidence that disclosure is, at best, insufficient for addressing conflicts of interest." Indeed, he continued, "there is convincing evidence that disclosures are frequently confusing and misleading for investors, even when made under the best circumstances with the purest of intentions."
Tim Ryan (left), CEO of the Securities Industry Financial Markets Association (SIFMA), alluded to the SEC taking a disclosure-based approach to fiduciary duty in comments he made in late October. Ryan said in his comments then, before the Washington Economics Club, that the uniform fiduciary standard that the SEC is busy crafting will likely be a “modified ’40 Act standard” that incorporates additional disclosures. But, he said, it will be “disclosure that’s understood.”
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, says that while it’s “certainly possible” the SEC could adopt a disclosure-based standard for brokers, the IAA’s biggest fear is that the SEC tries to “define fiduciary duty, which many brokers would prefer.”
One of the greatest strengths of the fiduciary duty, Tittsworth (left) argues, “is that it is an overarching duty to put the client’s interest first, which includes the duty to disclose potential conflicts of interest. Defining fiduciary duty could erode one of the greatest strengths of the fiduciary standard--as well as provide a roadmap for wrongdoers: everything that is not defined as a fiduciary activity would fall outside of the standard.”
While the report that the SEC hands to Congress on Jan. 21 will provide clarity on where the SEC is headed regarding fiduciary, Tittsworth says “the real proof will be the SEC’s subsequent rulemaking proposal.”
The SEC will send its studies under Sections 913 and 914 of Dodd-Frank to the new Congressional chairmen, Rep. Spencer Bachus (R-Ala.), of the House Financial Services Committee; and Sen. Tim Johnson (D-S.D.), of the Senate Banking Committee.