More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
As experts debated Tuesday the current regulatory framework for advisors and whether brokers should be held to the same fiduciary standard as advisors, Marcus Stanley, policy director for Americans for Financial Reform, argued that fiduciary advice for retail clients is particularly “pressing.” He cited the rise of complex structured products and the fact that the top complaint in Financial Industry Regulatory Authority (FINRA) arbitration cases is breach of fiduciary duty.
Michelle Ong, spokeswoman for FINRA, confirmed to AdvisorOne on the day of Stanley’s assertion that fiduciary duty is indeed the biggest complaint in arbitration cases.
Stanley said the emergence of structured products plus the recent passage of the JOBS Act, which “allows increased solicitation of retail investors” to invest in such products as hedge funds and private equity, puts a fiduciary duty for brokers at the fore. “Study after study has shown that complex products don’t perform well,” Stanley told attendees at a joint forum held by the Institute for the Fiduciary Standard and Cato Institute on the regulation of advisors.
The Securities and Exchange Commission’s (SEC) staff study on putting brokers under a fiduciary standard as mandated under Section 913 of Dodd-Frank “contains extensive documentation” regarding investors' inability to understand the difference between a broker and an advisor, Stanley said.
The principles-based fiduciary standard under the Investment Advisers Act of 1940 is “inherently flexible and it can be adopted by brokers,” Stanley said, “but we have to make sure that flexibility doesn’t mean watering down” such a standard.
Former SEC Chairman Harvey Pitt (left), who also sat on the panel, agreed that “many customers don’t understand the differences in a suitability [standard for brokers] versus fiduciary duty, and many lawyers don’t either.” But Pitt argued that a fiduciary standard can be “simple” and not result in a voluminous regulation like the Dodd-Frank Act.
Pitt told AdvisorOne in a separate interview that he believes brokers should be held to the same fiduciary standard as advisors, but “with carve-outs.” The real “issues,” he said, “are what services the professional is providing and what are the customers’ expectations.”
Pitt stated during the panel discussion that “if all you do is execute a transaction, not making a recommendation, you can define that in fairly simple terms.”
However, Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, another panelist, argued that “brokers have always been fiduciaries under state common law.” If an advisor or broker is providing “personalized investment advice you are a fiduciary—period.” And, he said, the advisor or broker “must ensure that the client understands” that fiduciary standard. “Any educated investor is going to insist on the fiduciary standard,” Rhoades said.
Kevin Carroll, managing director and general counsel for the Securities Industry and Financial Markets Association (SIFMA), declared from the audience that the issue now is “how do you implement a fiduciary standard” for brokers. “We don’t want the [Investment Advisers Act of 1940] standard imposed on us,” he told the panelists. The issue now is: “How do you articulate a [fiduciary] rule for both industries?”
The fiduciary issue will have to move forward next year without Schapiro at the helm, however.
Another issue that will regain steam next year is the threat of a self-regulatory organization (SRO) for advisors—an issue David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, who also served as a panelist, called the “biggest issue” advisors will confront. While the bill from House Financial Services Committee Chairman Spencer Bachus, R-Ala., calling for an SRO is “dead” this year, the SRO issue will be revived next year, with new players at the SEC, in Congress and possibly in the White House, he said.
Hester Peirce, Senior Research Fellow at the Mercatus Center at George Mason University, agreed, stating that “interest in [the SRO] idea will continue because the SEC is clearly overwhelmed and the complexity of advisors that it is now overseeing [with oversight of hedge fund advisors] will pose challenges” to the agency.