January 24, 2011

SEC Fiduciary Report Is a ‘Bold Blueprint’

In rule-making to come, a call to adhere to the Advisers Act standard, as confirmed by the Supreme Court

 

The SEC staff has written an excellent study on extending the fiduciary standard to all advice givers which reflects a keen understanding of the differences between the suitability and fiduciary standards. It calls for a uniform standard that does not “supplant” the 1940 Advisers Act, and explicitly states that “the existing guidance and precedence under the Advisers Act regarding fiduciary duty as developed primarily through Commission interpretive pronouncements … will continue to apply to investment advisers and be extended to broker-dealers, as applicable, under the uniform fiduciary standard.”

Moreover, the study recommends “a fiduciary standard no less stringent than currently applied to investment advisers under the Advisers Act” and the standard for all brokers, dealers, and investment advisors “when providing personalized investment advice about securities to retail customers… shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing advice.”

This study is a bold blueprint and provides an excellent foundation for the rulemaking to follow, where the standard will be shaped. The staff are to be commended for their excellent work. Most significantly, the report’s repeated reinforcement of the need to preserve the fundamental fiduciary duties of loyalty and care establish touchstone principles that are central to meaningful reform.

(Mr. Rostad is the chairman of the Committee for the Fiduciary Standard; see AdvisorOne's multipart exclusive series on the process by which a fiduciary standard came to prominence over the past two years.)

In 1963, when the investment advisor’s fiduciary status was explicitly confirmed by the U. S. Supreme Court in the seminal SEC V Capital Gains Research Bureau, the duty

 

of loyalty was a central theme in the Court’s opinion in its discussion of the inherent challenges to advisers’ rendering objective advice and overcoming conflicts of interest.

The Court reviewed the legislative history of the Investment Advisers Act, and noted that because of “what happened in this country in the 1920s and 1930s” it is essential that “the highest ethical standards prevail in every facet of the securities industry.” Critically, the Court also quoted an SEC report, authorized by Congress in 1935 and which addressed investment advisory services.  The Court explained:

“The report reflects the attitude – shared by investment advisers and the Commission – that investment advisers could not “completely perform their basic function – furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments – unless all conflicts of interest between the investment counsel and the client were removed. 16”      

The U. S. Supreme Court in Capital Gains used clear and concise language to articulate the intent of the Investment Advisers Act of 1940, an “intent” that in no small part seems influenced by the SEC itself. The intent of the Investment Advisers Act appears on the mind’s of the SEC staff authors of the January 22 report to Congress.

SEC Commissioner Elisse Walter (left) has forcefully and passionately articulated the importance of a uniform standard, and that her Aunt Millie “regardless of the title held by the person sitting across the desk from her…. will receive an appropriate and comparable level of protection.”

As the SEC proceeds with rule-making, the standard against which a uniform fiduciary standard should be measured, and how well the uniform standard provides equal protection under the law, should be the Investment Advisers Act standard articulated by the Supreme Court. 

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