More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Hoping to break the stalemate in the Securities and Exchange Commission’s efforts to write a rule to put brokers under a fiduciary mandate, seven leading consumer and industry organizations supporting a uniform fiduciary duty provided the SEC on Thursday with a “roadmap” for resolving the debate about how to create that rule.
To move the current “deadlocked” process forward, the groups say the “compromise framework” uses a July 2011 letter from the Securities Industry and Financial Markets Association (SIFMA) as a starting point to the SEC finding “common ground” with many of the groups’ positions and suggesting a path forward where there is disagreement.
The organizations represented in the letter are the Consumer Federation of America, Fund Democracy, AARP, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, and the National Association of Personal Financial Advisors.
In the 16-page letter to SEC Chairwoman Mary Schapiro, the groups say that they all “strongly support extension of the Investment Advisers Act of 1940 fiduciary duty to all broker-dealers when they offer personalized investment advice about securities to retail customers."
The SEC, the groups say, should define “personalized investment advice” to which the fiduciary duty would apply and “supplement that definition with guidance regarding the types of business activities that would, and would not, constitute such advice.”
Moreover, the groups also say they support the general approach to accomplishing this goal outlined in the Section 913 Study issued by the commission staff in January 2011: the adoption of parallel rules imposing a uniform fiduciary duty on broker-dealers and investment advisors consistent with Congress’s grant of authority under Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. “Properly implemented," the letter said, "this approach would provide badly needed and long overdue protections for individuals who receive investment advice from broker-dealers without imposing undue regulatory burdens on brokers and without disrupting transaction-based aspects of the broker-dealer business model.”
The groups went on to say that brokers’ concerns are “clearly unfounded” that imposition of a fiduciary duty on their “personalized investment advice could have catastrophic consequences—forcing brokers to abandon commission-based compensation, proprietary sales, or transaction-based recommendations.”
While the SEC must be “mindful of the impact upon the industry as it implements the fiduciary standard for brokers, it must also avoid an over response to expressions of broker-dealer concerns that reflect either a misunderstanding of the standard or an unwarranted effort to limit its scope,” the groups wrote. “The result of accommodating such unfounded concerns would undermine entirely the Congressional initiative to provide necessary investor protections. As long as the Commission stays true to the vision outlined in the Section 913 Study, however, it can implement the standard in a way that retains aspects of the broker-dealer business model investors value while fulfilling the Congressional mandate to improve protections for investors.”
Barbara Roper, director of investor protection for the CFA, said in releasing the framework that “As markets become increasingly tumultuous and financial products become increasingly complex, investors desperately need advice they can rely on to help them achieve their investment goals. The most important thing the SEC can do to support that outcome is to move forward on a rule requiring brokers to act in their customers' best interests when providing personalized investment advice and recommendations.”
The framework, she said, “is intended to help the SEC identify a way forward on rulemaking that can win broad investor and industry support, improve investor protections, and preserve investor choice.”
David Tittsworth, executive director of the Investment Adviser Association, added that “The Advisers Act fiduciary duty serves as a bedrock principle of investor protection, and the IAA has long supported its application to those who provide personalized investment advice about securities to retail clients. The duty is well-established and has been consistently interpreted by the courts and SEC for decades. It is incumbent upon the SEC to not weaken it or otherwise dilute its investor protection benefits.”