More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
Since the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, my primary focus of interest has been on the issue of fiduciary duty. As the bill was being finalized, I was at first ecstatic when the original proposal included what seemed to be a clear requirement that anyone providing advice be held to a ’40 Act fiduciary standard. When the lobbyists managed to insert a six-month study period, I became depressed;
When the SEC issued its study on the fiduciary duty, I was once again happy. However, when two of the SEC Commissioners criticized the study I was sent back to my state of depression; When the SEC, post study, seemed to reiterate its support of a substantive fiduciary duty, I was back to happy.
Unfortunately, I believe I was also naive.
According to some reports, Wall Street invested nearly $52 million in just the first three months of the year lobbying to whittle down or eliminate many of the Dodd-Frank provisions, including the fiduciary standard. As Mr. Bartlett, chief of the Financial Services Roundtable (one of the major Wall Street lobbying groups) so eloquently put it, “We are trying to reform the reform.” I think they’re succeeding. When Democratic Congressman Barney Frank, coauthor of the bill and now the ranking member of the House Financial Services Committee, wrote to the SEC Chair that “the requirement that the new standard be ‘no less stringent’ …was not intended to encourage the SEC to impose the Investment Advisers Act standard on broker-dealers …” David’s chances against the goliath of Wall Street seemed increasingly bleak.
Of SIFMA, Rules and Principles
The most recent grenade in the debate was SIFMA’s proposal to the SEC titled “Framework for Rulemaking under Section 913 (Fiduciary Duty) of the Dodd-Frank Act.” The title itself highlights what I believe is the major disconnect between those lobbying for a “new” fiduciary standard and those of us rooting for a substantive fiduciary standard; namely the reference to “Rulemaking.”
As SIFMA proposes in its Executive Summary, “The standard should be articulated through comprehensive SEC rulemaking…” and “The SEC would also issue rules and guidance to provide the detail, structure and guidance necessary to enable broker-dealers and investment advisors to apply the uniform fiduciary standard of conduct to their distinct operational models.”
But fiduciary obligations are based on principles, not rules.
The SIFMA proposal adds “The inability to gauge compliance with or legal
Unfortunately, the emphasis on Rules vs. Principles is only the beginning of the lobbying argument.
For example, SIFMA proposes restricting the fiduciary duty by contract: “… the customer agreement might specify that the broker-dealer’s obligations do not extend beyond the particular sale….or the obligations may appropriately be limited to assets over which the broker-dealer has been given discretionary authority.” SIFMA even proposes that personalized investment advice should not include “account and customer relationship maintenance…needs analysis..[or] providing ancillary account features and services.” If these provisions were to be implemented, the fundamental concept of a real fiduciary, derived from the Latin words for “faith” and “trust,” would disappear.
My Fears, My Hopes
One year later I fear that not only have proponents for a real fiduciary standard potentially lost the battle, we may well lose the war. At best I hold little hope for much substantive benefit from Dodd-Frank regarding a real fiduciary standard. If many of the SIFMA proposals succeed in getting implemented it may be good for Wall Street but investors may well be worse off than before Dodd-Frank. That’s why I’m depressed.
So, what to do? I look to the public media to step up and alert investors that they can bypass the current debate and seek their own protection by simply asking their advisor to sign the following simple Mom and Pop and apple pie commitment:
- I will put your best interests first;
- I will act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
- I will not mislead you and I will provide conspicuous, full and fair disclosure of all important facts;
- I will avoid conflicts of interest;
- I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
For anyone obtaining this commitment from their advisor, Dodd-Frank will be moot.
For more on the fiduciary issue and the Dodd-Frank first anniversary, see:
And additional AdvisorOne reporting on the Dodd-Frank anniversary.