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.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
On Jan. 22, 2011, the SEC officially released its long-awaited study on the appropriate standard of care for investment advisers and broker-dealers. Key tenets to the study:
The regulatory regime that governs the provision of investment advice to retail investors is essential to assuring the integrity of that advice and to matching legal obligations with the expectations and needs of investors. [pg i]
Investors have a reasonable expectation that the advice that they are receiving is in their best interest. They should not have to parse through legal distinctions [emphasis added by Ethos] to determine whether the advice they receive was provided in accordance with their expectations. [pg 115]
The SEC has concluded that both advisers and brokers should be held to a “uniform fiduciary standard of care:”
Specifically, the Staff recommends that the uniform fiduciary standard of conduct established by the Commission should provide that:
the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), 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 the advice. [pg vi]
The SEC’s next step (scheduled to take place over the next six months) is to engage in rule-making to implement the uniform fiduciary standard of care, and to “harmonize” the adviser and broker regulations associated with the uniform standard.
It’s important to note how the SEC uses certain terminology; the term “universal” is associated with the standard of care; and the term “harmonized” is associated with the regulations.
Opinions of Strategic Ethos
1. Overall, I believe the SEC got it right. The study also provides a measured and balanced response to the concerns raised by broker-dealers.
2. The SEC has stated that the uniform fiduciary standard of care will apply when the adviser or broker is providing “personalized investment advice.” I think the definition is too broad: The SEC should consider tightening the definition to read, “Comprehensive and continuous investment advice.” Such a change would be consistent with the SEC’s current definition of what constitutes “assets under management.”
“Assets under management” is defined as the securities of portfolios for which the adviser provides continuous and regular supervision or management services. [pg 17]
Furthermore, “comprehensive and continuous” parallels the language used by the CFP Board and FPA to define when a fiduciary standard is applicable to financial planners.
Rule 1.4: A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.
3. The rule-making, which is to follow over the next six months, will deal with such subjects as:
- Duty of loyalty;
- Duty of care;
- Advertising and other communications;
- Use of finders and solicitors;
- Licensing and registration;
- Continuing education requirements;
- Books and records;
- Principal trading;
- Code of ethics; and
- Policies and procedures manual.
4. The study acknowledges the potential negative impact a uniform standard could have on many broker-dealer business models, and the SEC stated it will attempt to mitigate the impact through rule-making (see above). I believe the easiest solution is to adopt the “comprehensive and continuous” language proposed above, since most of the concerns raised by brokers were related to the execution of trades and the selling of financial products.
Though there are two references to the ERISA fiduciary standard, the study did not take into account that advisors and brokers also may be subject to fiduciary standards when advising personal trusts, foundations and endowments. If we are to define a uniform standard, and promulgate harmonized regulations, then such standards and regulations should be applicable to any fiduciary engagement.
Don Trone is the founder and CEO of Strategic Ethos.