More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
In a bid to push the deadlocked fiduciary rulemaking process forward, advisory and consumer trade groups that support broadening the fiduciary role for all advice givers made an unusual move in late March. Those groups told the SEC that they support portions of the framework put forth by the brokerage industry’s trade group to develop such a rule.
However, the groups stressed that while they agree with many of the points laid out in the Securities Industry and Financial Market Association’s proposal from July 2011 regarding the route that should be taken in developing a fiduciary rule for brokers, they also “disagree, sometimes strongly, with others.”
Namely, the pro-fiduciary groups argue against SIFMA’s assertion that the SEC should create a new fiduciary duty standard. The groups write that the “goal in writing the new rules should be to extend the existing Advisers Act standard to brokers, while clarifying its applicability in the context of broker-dealer conduct, rather than to replace the Advisers Act standard with something new and different.”
In their 16-page letter to SEC Chairman Mary Schapiro, the groups—which include the Investment Adviser Association, the Consumer Federation of America, AARP, CFP Board, Fund Democracy, the Financial Planning Association, and the National Association of Personal Financial Advisors—state that they “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 best way to accomplish this goal was outlined in the Section 913 study issued by the Commission staff in January 2011, the groups state, which called for the adoption of “parallel rules imposing a uniform fiduciary duty on broker-dealers and investment advisers consistent with Congress’s grant of authority under Section 913 of the Dodd-Frank 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 also argue that broker-dealer claims that imposing a fiduciary duty on them would force them to abandon commission-based compensation, proprietary sales or transaction-based recommendations are “clearly unfounded.”
Broker-dealers’ claims in this regard, the groups say, “ignore both the clear direction from Congress with regard to how the fiduciary duty would be applied and extensive evidence that the Advisers Act fiduciary duty is sufficiently flexible to apply to a variety of business models.”
“The result of accommodating such unfounded concerns,” the groups wrote, “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.”
How Fiduciary Duty and Selling Can Co-Exist
The groups then point to long-standing practices under the Advisers Act as applied to dual registrants and to financial planners who are registered as investment advisors “for evidence that the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products and sale from a limited menu of products.”
Further, the groups say they disagree with the conclusion SIFMA draws that “‘in order to maintain broker-dealer products and services for investors,’ the obligations of broker-dealers under the uniform fiduciary standard should not be governed by ‘the existing rules, case law, guidance or other legal precedent under Section 206 of the Advisers Act.’”
This conclusion, the groups say, is based on a “false picture of the existing legal precedent and guidance. Moreover, SIFMA suggests that this legal precedent and guidance should continue to apply to investment advisors. On the face of it, this proposed approach fails to meet the explicit Dodd-Frank Act requirement that the fiduciary standard be identical for brokers and advisers and no less stringent than the existing standard.”
After citing numerous case law examples, the groups also say that SIFMA “appears to have scoured the record and found nothing in the existing rules, case law, guidance or other legal precedent that suggests that the existing Advisers Act fiduciary standard cannot be appropriately applied to brokers’ transaction-based business model.”
One area where the groups agree with SIFMA is that the SEC 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. However, while SIFMA believes this explanation should be included in the rule, the groups argue that this would result in a bulky, complex and rigid rule that would “be vulnerable to gamesmanship.”
By adopting a general principles-based rule, the groups say, “and supplementing that with guidance, the Commission can provide the clarity that SIFMA is seeking without sacrificing the flexibility needed to respond to changing market conditions.”