More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- 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.
How do you pack 80 years of financial history into 15 minutes? That was the tall order given to Rutgers University law professor Arthur Laby at TD Ameritrade’s 2013 Fiduciary Leadership Summit in Palm Beach, Fla., on Thursday.
The short oral history was billed as a way to set the stage for many of the fiduciary-related issues that would be discussed that afternoon.
Laby began by noting recent lawsuits brought by the Financial Planning Association and the Business Roundtable relating to the SEC’s attempt to grant the brokerage industry fiduciary status “greatly influenced the debate.”
He added that broker-dealers originally were just that; “brokers acted as agents for the client, while dealers acted as principals with the clients.” They were subject to the Securities Exchange Act of 1934 under a separate SRO framework.
Investment advisors did not (and do not) not have an SRO framework and are regulated under the Investment Advisers Act of 1940.
As long as any advice broker-dealers offered was “incidental,” and they did not collect “special compensation,” they were not subject to regulation under the Investment Adviser Act.
“It worked pretty well for quite some time,” Laby explained. “Then life got difficult in 1975. Until that time, commissions were fixed, almost like public utilities, but Congress eliminated fixed commissions.”
It was around this time that broker-dealers began to market themselves as advisors.
“It was hard then to argue that the advice was incidental. If anything, it was the opposite. The brokerage portion was incidental to the main dish of advice.”
In addition, broker-dealers began charging asset management fees. They lobbied the SEC by arguing that simply re-pricing their services shouldn’t subject them to the Investment Adviser Act.
“It was also hard to argue that with the two prongs of advice and compensation no longer excluding them, they shouldn’t be subject to the IA act, but that’s what they argued, and the SEC agreed.”
It culminated in the FPA’s lawsuit, which it won. The ruling, issued March 30, 2007, struck down the SEC rule—the so-called "Merrill Rule"—that exempted brokers from being regulated as investment advisors (under the Investment Advisers Act of 1940) in fee-based brokerage accounts.
“The issue of fiduciary started with the SEC, went to Congress with Dodd-Frank, went back to the SEC with the staff study, went to the staff who then reported the findings back to the SEC,” he concluded, noting there still is not a standard.
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