More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
In a Bloomberg interview, SEC Chairman Mary Schapiro said the agency would issue a proposed fiduciary rule in 2012 that would be “business-model neutral” and allow brokers working with retail investors to sell proprietary products and charge commissions. Industry officials say exactly how the SEC crafts this business-model neutral approach will be crucial to determining whether the agency actually ends up putting brokers under a fiduciary mandate.
“If by ‘business model neutral’ the intention is simply to make provision for commissions and proprietary product, I am neither surprised nor too concerned,” says Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., and a member of the Committee for the Fiduciary Standard. “That is assuming that the core elements of a fiduciary relationship are included” in the final fiduciary rule.” However, Evensky continued, “if by ‘business neutral’ the result is the one sought by many in the brokerage and insurance industry; i.e., redefine ‘fiduciary’ as enhanced ‘suitability’ with opt-out provisions, then we will end up with the worst of all worlds.”
Yet others say that taking a “business model-neutral” approach is the “balanced” way to go. While there’s no doubt that the SEC is “trying to walk a fine line given the political and economic realities” as it develops the fiduciary rule, says Brian Rubin, a partner in the law firm Sutherland Asbill & Brennan, “promoting a ‘business-model neutral’ formulation is a very balanced approach,” and is “consistent with what [Schapiro] has been saying for a while.” By contrast, Rubin said, a strict fiduciary standard “would have called into practice and likely prohibited” practices such as selling proprietary products.
Section 913 of Dodd-Frank allows principal-trading and proprietary products as well as charging brokerage commissions, says David Tittsworth (left), executive director of the Investment Adviser Association, and “It’s no secret that Section 913 of Dodd-Frank represented a compromise among competing interests.” The question of whether brokers should have the same fiduciary duty as investment advisors has been and “continues to be very controversial,” Tittsworth says, and “Section 913 reflects that controversy.”
Indeed, Knut Rostad, president of the Institute for the Fiduciary Standard, adds that while Dodd Frank “states clearly that commissions and proprietary products ‘in and of themselves’ do not presumptively breach the fiduciary standard,” Section 913 “does not state that any particular commission transaction and its facts and circumstances are ‘protected’ from fiduciary requirements.” Like a non-commission transaction, Rostad continues, “it needs to be evaluated on its own merits. In
Section 913 creates a “fairly complicated roadmap” the SEC must follow in crafting a fiduciary standard, Tittsworth adds. For example, “it gives the SEC explicit authority to issue rules that would apply the same standard of conduct that investment advisors have. But it also states that the receipt of commissions and sale of proprietary products will not, in and of themselves, be a violation of that standard. And it would apply when brokers are providing “personalized investment advice about securities to a retail customer.”
Other industry executives were encouraged by Schapiro’s comments that a fiduciary rule will be business-model neutral. Dale Brown (left), president and CEO of the Financial Services Institute, says that FSI “has been calling for a uniform fiduciary standard since the beginning of the regulatory reform debate,” and that the independent broker-dealer group is still working “to ensure the proposal creates a new uniform fiduciary standard while maintaining client choice and client access to affordable advice.” With Schapiro’s comments, he said, “the SEC is showing a real willingness to understand our industry and our clients’ needs, which is refreshing.”
Dan Barry, the Financial Planning Association’s managing director of government relations, said Schapiro’s reported comments “are consistent with the language in Dodd-Frank and with what has been expected,” in preserving proprietary products and commissions. What will be important, he said, is setting up rules that allow for proprietary products and commissions while “making sure that investors are getting advice that is in their best interest.”