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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Now that Rep. Spencer Bachus reintroduced his bill to establish an SRO for investment advisors (as Melanie Waddell reported on AdvisorOne on April 25), the focus of the re-reg debate has returned to whether FINRA should be that SRO, and whether it should apply SIFMA’s guidelines as a uniform fiduciary standard for brokers and advisors. To sort it all out, I had a conversation with my friend Knut Rostad, compliance officer at Rembert Pendleton Jackson, and founder of The Institute for the Fiduciary Standard.
The conversation started when I asked Knut how he felt about SIFMA’s watered-down fiduciary standard. He replied by saying that calling it a “watered-down” version was completely misleading. The truth, he said, is that SIFMA does not support a fiduciary standard for brokers, or at best, supports it in name only. Consequently, using that term only promoted SIFMA’s fiction.
Despite my defense that “watered down” is the usual term we apply to laws or regulations that have had their original teeth removed, and that calling SIFMA out and out liars on the subject may tend to marginalize one as a melodramatic, Knut made a compelling case that such strong language is warranted. I’ll let you be judge.
Using the PowerPoint from his recent speech at the fi360 conference in Chicago, Knut detailed how the SIFMA standard differs from key elements in the fiduciary standard that RIAs are currently subject to under the Advisers Act of 1940. Here’s what the side-by-side comparison looks like:
Advisers Act: Recommendations are made in the client’s best interest.
SIFMA: Recommendation is suitable; no best-interest due care.
Advisers Act: Undermine unbiased advice; must be avoided at all possible.
SIFMA: Need not avoid; may benefit client; champions conflicted advice.
Fees and Expenses
Advisers Act: Expenses must be controlled, with higher than usual costs in the client’s best interest.
Scope of Obligation
Advisers Act: At all times when providing investment advice; continuous, based on relationship of trust and confidence.
SIFMA: Limited to recommendations about the purchase or sale of a security, or discretionary decision; sporadic, based on account, discussion topic, or contract.
Disclosure of Conflicted Advice
Advisers Act: Effectiveness for investor; advisor is responsible to ensure the client fully understands disclosure; the transaction in question must meet the best interest standard.
SIFMA: Efficiency for broker/dealer; investor is responsible for understanding disclosure.
As you can see, there is a world of difference between RIAs’ current standard and the one proposed for brokers by SIFMA. Is it then fair to say that SIFMA does not, in fact, support a fiduciary standard? Well, it certainly doesn’t support a ’40 Act standard, which is the requirement for a broker standard under the Dodd Frank Act, that would put advisors and brokers on a level playing field.
If you don’t like the work “lieing” let’s just say that SIFMA is dissembling—because it certainly isn’t supporting any fiduciary standard that I’ve ever seen.