More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
A fiduciary rule from the Securities and Exchange Commission (SEC) looks to be years away. Three to four years away is the prediction Knut Rostad, president of the Institute for the Fiduciary Standard, recently gave me. During that time period, he said, “we aren’t going to see any fiduciary rule with teeth.”
While industry observers have been adamant that the SEC’s fiduciary process has stalled, SEC Chairwoman Mary Schapiro told me in a mid-September interview that while “it may appear from the outside it has stalled, work has been going on here [at the agency] to advance the issue.”
Schapiro said that the fiduciary issue remains “really important,” and that she’s “ready to go” on releasing a request for information to allow the public to help inform a “more detailed” cost-benefit analysis on the agency’s fiduciary rule. Declining to say whether a rule proposal would come by year-end, Schapiro said “it would be nice to get this final request for information.”
Still, industry experts like Neil Simon, vice president of the Investment Adviser Association (IAA) in Washington, argue the SEC is “nowhere close” to voting on a fiduciary rule proposal.
Barbara Roper, director of investor protection at the Consumer Federation of America (CFA), added on a recent conference call that pressure from Congress to perform that more detailed cost-benefit analysis has basically “paralyzed” the agency.
Roper (left) also believes that Schapiro is taking it slow in proposing a rule for fear of litigation. “Because of the threat of litigation, [Schapiro] is now reluctant to move forward” on a fiduciary proposal without support from a Republican commissioner, Roper said.
What’s more, the SEC is faced with mandatory rulemakings under the Dodd-Frank Act and, more recently, the JOBS Act, so the SEC will “prioritize” its rulemakings. Dodd-Frank only gave the agency the authority to write a fiduciary rule; it didn’t mandate one.
Yet another factor is that Schapiro could likely be departing her post at the end of this year. Rostad and David Tittsworth, executive director of IAA in Washington, say the word on the street is that it’s unlikely that Schapiro will continue as chairwoman after this year, even if President Obama is re-elected.
While it’s certainly not unusual to see a “fair amount” of turnover at federal agencies in the wake of a presidential election, Tittsworth says that if Mitt Romney wins the White House, it’s widely expected that he will appoint a replacement for Schapiro.
“Significant changes in the composition of the Commission” could well occur after the elections, Tittsworth said, “and those changes may very well determine the fate of the Section 913 [fiduciary] rulemaking.”
Rostad did say there was a “small chance” that Schapiro would issue a fiduciary rule proposal by year-end. He attempted to reignite the stalled fiduciary process by christening September as “Fiduciary September,” and he, along with heavyweights like Vanguard founder John Bogle and former SEC Chairman Arthur Levitt, planned to meet with Schapiro in mid-September to try to press her to move forward with a rule. However, industry experts predicted those efforts would prove futile.
While Fiduciary September is important because it raises “the profile of the issue” and “reignites the discussion,” Roper said during the conference call that was held by the Institute for the Fiduciary Standard in early September, it may not be enough to boost the chances of any real action taking place.
But it looks as though the Department of Labor (DOL) could repropose its fiduciary rule before year-end.
Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, who was also on the call with Roper and Rostad, said that he’s heard rumblings that the DOL plans to repropose its fiduciary rule in November, depending on which way the election goes.
DOL, Roper said, “has continued to move forward” with its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), and DOL’s “spirit on this issue has the ability to get this [fiduciary] issue moving again” at the SEC.
Roper also remarked that the advisory industry needs to cooperate with the Securities Industry and Financial Markets Association (SIFMA)—Wall Street’s lobbying group—if it stands a chance of jump-starting the process at the SEC again.
Rostad (right) argued that SIFMA’s approach to a fiduciary standard “is a sales/broker standard and not a fiduciary standard at all.” But Roper countered that “the best chance” to get the SEC moving again on a fiduciary rulemaking is to focus on areas where SIFMA and the advisory industry agree regarding how the SEC should craft a fiduciary duty for brokers.
It’s important to highlight “the areas of agreement regarding the appropriate approach, which are significant, rather than always highlighting our differences,” Roper told me. “While the differences are important and can’t be ignored, our best chance of success will come if we can build from that common ground and treat each other’s viewpoint with respect.”
Roper laid out the areas where SIFMA and the advisory industry agree. “We both support moving forward through parallel rules under the Advisers Act and Exchange Act establishing a principles-based rule for personalized investment advice to retail investors, supported by a combination of rules and guidance to help clarify how that standard applies to the broker-dealer business model,” she said. And, “I think we also agree that it was the clear intent of Congress to preserve the ability of brokers to offer advice within the context of a sales-based business model; in other words, that the goal was not to eliminate conflicts but to ensure that any conflicts were fully disclosed and appropriately managed.”
FINRA Rules Could Provide Substitute for Fiduciary Standard
If the SEC proves incapable of moving forward on fiduciary rulemaking, Roper said it’s also possible to “make progress raising the standard of conduct for brokers and improving the ability of investors to make an informed selection of financial intermediaries through FINRA rulemaking,” pointing to FINRA’s recently amended suitability rule, and its concept release that would require a disclosure statement be presented to retail investors at or before commencing a business relationship.
But Rhoades said FINRA’s new suitability rule is still only “a minor” improvement. “There is still a huge difference between suitability requirements and the fiduciary standard.”