More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- 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.
The Securities and Exchange Commission (SEC) told Congress that it would move forward in creating a new uniform fiduciary standard of care for broker-dealers and investment advisors when providing advice to retail customers.
The SEC released its study mandated under Section 913 of the Dodd-Frank Act Friday night.
The SEC said in its report that it recommends “the consideration of rulemakings that would apply expressly and uniformly to both broker-dealers and investment advisers, when providing personalized investment advice about securities to retail customers, a fiduciary standard no less stringent than currently applied to investment advisers” under the Investment Adviser Act of 1940.
The two Republican SEC Commissioners, Kathleen Casey and Troy Paredes, issued a joint dissent to the report’s findings, stating that the study “fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors.”
Casey and Paredes said they opposed the study’s release to Congress as drafted, and that the study fails to fulfill the statutory mandate of Section 913 of Dodd-Frank to evaluate the “effectiveness of existing legal or regulatory standards of care” applicable to broker-dealers and investment advisors.
While industry executives say the SEC’s report is a definite step in the right direction in leveling the playing field for brokers and advisors, the devil will be in the details as the securities regulator launches into the rulemaking process.
Barbara Roper, Director of Investor Protection at the Consumer Federation of America (CFA), says that with the report, the “SEC has taken the first, tentative step toward reversing that anti-investor policy by issuing a report calling for brokers to be subject to the same high standards all other advisers must meet when they recommend securities to investors.” For years, Roper continued, the SEC “has stood by and allowed broker-dealers to market themselves to investors as trusted advisers without requiring them to meet the most basic standard appropriate to that role—a fiduciary duty to act in their customers’ best interests.”
Don Trone (left), CEO of Strategic Ethos, says he believes the SEC “got it right,” and “captured the requisite subtleties associated with a fiduciary standard, while providing an appropriate and measured response to the concerns raised by broker-dealers.”
As the SEC takes the next step and adopts rules implementing the uniform fiduciary standard, two divisions at the SEC—Investment Management and Trading & Markets—will have the ultimate authority in drafting and implementing those rules. The agency must implement the standard in “a way that maximizes investor protections while preserving investor choice,” says Roper. “Because fiduciary duty is a flexible standard that can accommodate a variety of business models, we are fully confident that this is an achievable goal, and we look forward to working with the Commission to achieve it.”
David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, agrees that while the report provides a “basis” for future rulemaking, “it is not going to be a smooth and easy road. The devilish details regarding standard of care and other harmonization issues will be critical in understanding the effect of any proposed rules.”
Regarding standard of care, Tittsworth (left) added, IAA has “two major concerns.” First, “we will work to oppose efforts to weaken or water down the well-established fiduciary duty under the Advisers Act. Second, we think it would be a mistake to establish different standards of care for different types of clients.”
Another worry, says Trone with Strategic Ethos: that the SEC will appoint the Financial Industry Regulatory Authority (FINRA) as “the fiduciary guardian” for advisors. “That concerns me. FINRA has a rules-based orientation and culture; fiduciary standards are based on principles, not rules. The ideal would be for the SEC to retain the role of fiduciary guardian, and delegate only the examination and auditing activities, as defined by the SEC, to FINRA."
Ira Hammerman, general counsel for the Securities Industry and Financial Markets Association (SIFMA), said after the report's release that SIFMA supports a uniform fiduciary standard of care for brokers and advisors, and that the SEC's report articulates a "workable comprehensive approach for personalized investment advice for retail customers." However, he said, SIFMA remains concerned about a uniform fiduciary standard's "possible effects on broker-dealers' ability to serve customers as this approach is developed" and that SIFMA will "continue to work with the SEC to ensure that the broker-dealer role is not hindered."
The SEC report also states that Section 913 of Dodd-Frank, “explicitly provides that the receipt of commission-based compensation, or other standard compensation, for the sale of securities does not, in and of itself, violate the uniform fiduciary standard of conduct applied to a broker-dealer. Section 913 also provides that the uniform fiduciary standard does not necessarily require broker-dealers to have a continuing duty of care or loyalty to a retail customer after providing personalized investment advice.”
Read why the fiduciary standard became a hot topic for regulators at the SEC at AdvisorOne.