More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- 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.
As ThinkAdvisor’s Melanie Waddell reported Monday (SEC Investor Advisory Committee to Vote Friday on Fiduciary Plan), the Oct. 4 recommendations by Barbara Roper’s Investor as Purchaser Subcommittee will finally come up for a vote by the SEC’s Advisory Committee on Friday.
These recommendations are notable for three reasons: The first is that they finally breathe some sanity into the fiduciary issue from an SEC-affiliated body. Second is that SIFMA’s response to the recommendations finally reveals the brokerage industry’s level of denial on the fiduciary issue — and should serve as a warning flag to its supporters. Third, is my nomination for the funniest line of 2013, by Ms. Roper, when describing the timing of her subcommittee’s recommendations for a fiduciary rule mandated under the Dodd-Frank Act which was signed into law on July 21, 2010: “by weighing in early in the [fiduciary rulemaking] process, we hope we can help to shape the form that commission rulemaking takes.”
To be sure, the Investor as Purchaser Subcommittee’s recommendations powerfully make the case that the goal of broker reregulation “should be to eliminate the regulatory gap that allows broker-dealers to offer investment advice without being subject to the same fiduciary duty as other investment advisors…the question is not whether broker-dealers are adequately regulated when they act as salespeople but whether they are adequately regulated when they act as advisers. In the view of the Committee, the existing securities regulatory scheme that treats broker-dealers as salespeople does not offer adequate investor protection when broker-dealers offer advisory services, since under a suitability standard they generally remain free to put their own interests ahead of those of their customers.”
Toward that end, this subcommittee is the first official group (that I’ve heard of, anyway) to get right to heart of the fiduciary issue: “The Committee favors an approach that involves rulemaking under the Investment Advisers Act to narrow the broker-dealer exclusion [my emphasis added] from the [Investment Advisers] Act while providing a safe harbor for brokers who do not engage in broader investment advisory services or hold themselves out as providing such services.”
What’s more, the subcommittee goes on to address the question of investor caveat emptor: “Some others have suggested that regulation is not needed because investors are capable of choosing for themselves whether they prefer to work with a broker-dealer operating under a suitability standard or an investment adviser who is a fiduciary. This might have been true if the Commission had over the past several decades adopted a regulatory approach that maintained a bright line between broker-dealers and investment advisers. But that has long since ceased to be the case.”
What’s truly noteworthy about these recommendations is that they raise, for the first time by an SEC-affiliated body, the issue of harm caused by investor confusion over the difference between a fiduciary and a suitability standard: “Investors may be harmed if they choose a financial adviser under a mistaken belief that the financial adviser is required to act in their best interest when that is not the case, receive recommendations that comply with a suitability standard but carry additional costs or risks without affording additional benefits…Despite the difficulty of quantification, the Committee believes it is essential that the economic analysis currently being undertaken by the Commission acknowledge both the existence and importance of investor harms of this type that can result from advice delivered under a suitability standard.”
Perhaps even more meaningful than bringing up the issue of investor harm through fiduciary confusion is the securities industry’s response to it. In a comment letter to the subcommittee, SIFMA managing director Kevin Carroll wrote: “The subcommittee states that it is essential that the SEC’s Section 913 cost-benefit analysis acknowledge the harms that can result from advice delivered under the current, broker-dealer suitability standard.” However, “there is no evidence that investors are being harmed by the current suitability standard,” and that “there could never [emphasis added] be an empirical showing of whether or not suitability-based advice harms investors…”
Really, Kevin? No evidence? Could never be? I’m in a quandary about which idea to tackle first. The absurdity that there’s “no evidence” that investors are harmed if they assume their “advisor” is acting in their best interest when the advisor isn’t? (As if we need more than common sense here.) Or that the suggestion that the brokerage industry has covered its conflicted tracks so well—through mandatory arbitration and buried costs—that analysts will “never” find any evidence of it?
Perhaps these sentiments require no further comment. Hopefully, regulators, lawmakers, and mainstream financial journalists are paying enough attention to get the message: The thinking behind SIFMA’s “suggestions” for broker reregulation is that there’s no harm in investors believing that their brokers are acting in their best interests when, in fact, they are not. I believe that’s called “definition of character.”