More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Now that my old friend Steve Winks has written comments to last two blogs (April 10 and April 17), both about the Finke/Langdon study of the costs of a broker fiduciary standard, I feel somewhat compelled to respond. Steve’s comments seem largely to be captured by this statement: “Thus the research is fundamentally flawed as in general there are no brokers who are acting in a fiduciary capacity, regardless of whether the state they work in requires fiduciary standing or not. At best only a very few brokers in a firm of thousands are allowed to act in a fiduciary capacity and then only on an exception basis because the broker-dealer assumes fiduciary liability on every recommendation the broker makes.”
Perhaps Steve, and some of our other readers, may have knowledge on this subject beyond my own humble understanding, but I find the phrase “there are no brokers who are acting in a fiduciary capacity…” most curious. Again, maybe I’m missing something here, but it seems to me there are a few facts that suggest just the opposite. For instance, virtually all broker-dealers also have affiliated RIA firms, and many brokers get their Series 66 licenses to affiliate with those RIA firms specifically so they can provide investment advice and charge a fee for doing so.
What’s more, when FINRA through the SEC tried to exempt brokers who collected a fee for investment advice from registering under an RIA, in FPA v. SEC, the Federal Court clearly established that when acting like RIAs, brokers fell under all the requirements of an RIA, including a fiduciary duty. So, to my non-legal mind, brokers doing what most brokers do these days—which is to say, manage investment portfolios for a fee—clearly makes them fiduciaries, at least for some portion of their client engagements. So, it’s not clear to me how their BDs don’t “allow them to act in a fiduciary capacity.”
But also to my mind, that’s not the most curious part of Steve’s comment. Let’s say that he’s right: regardless of whether various state laws (and presumably federal laws, for that matter) confer a fiduciary standard on brokers, their firms just won’t let them “act” as fiduciaries. What Finke/Langdon found was no difference in client services or brokerage businesses in states with high fiduciary standards and those with no fiduciary standards. So what are SIFMA, the BDs, and Mr. Winks caterwauling about? If BDs can simply ignore a broker fiduciary duty by conducting business as usual—with no effect on their business or client service—why waste all this time and effort opposing Section 913 of Dodd-Frank? If they’re not acting like investment advisors now, why would that change if the law changed?
I haven’t run into anyone who wants to confer a fiduciary standard on brokers when they are acting as salespeople—and clearly disclosing that fact. The problem arises when brokers want to give investment advice (because it sells more product), without assuming the responsibilities of an investment advisor.
A law that effectively removes the “broker exemption” to the ’40 Act, and thereby forces brokers to choose between being advisors or salespeople, would clear up a great deal of client confusion—and if Steve’s right—not cost BDs a dime. So, where’s the beef?