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.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
While the industry awaits a decision by the SEC on whether it will move forward with a uniform fiduciary rule for brokers and advisors, fiduciary advocates will engage this month in a debate about the importance of the two fiduciary rulemakings being considered by the SEC and the Department of Labor, as well as what the industry's role should be in shaping fiduciary standards.
As Fiduciary September approached—and with only three months remaining until SEC Chairwoman Mary Jo White's self-imposed deadline for the agency to make by year-end a “threshold decision” on whether and how to move forward on a fiduciary rulemaking—I reached out to top fiduciary thinkers to get their views on where the commission may be headed.
The Institute for the Fiduciary Standard, which christened this month as Fiduciary September, is holding a series of fiduciary-related events throughout the month, while TD Ameritrade Institutional will hold its second Fiduciary Leadership Summit in Washington Sept. 15-17.
Skip Schweiss, president of TD Ameritrade Trust Co. and managing director of advisor advocacy and industry affairs at TD Ameritrade Institutional, said there's “a small but growing body of thinking in the advisor space that if regulators cannot or will not move ahead with rulemaking on a fiduciary standard, then maybe the profession should.”
David Tittsworth, CEO of the Investment Adviser Association in Washington, told me that the fiduciary rulemaking under Section 913 of the Dodd-Frank Act “certainly appears to be stalled,” with the two Republican commissioners, Daniel Gallagher and Michael Piwowar, signaling that “the costs of a potential rule outweigh the benefits.” At best, Tittsworth said, “it appears that the only way to find three votes” to move a fiduciary rule forward is among the commission's three Democrats: White, along with Commissioners Luis Aguilar and Kara Stein.
Don Trone, president of the Leadership Center for Investment Stewards and CEO of 3ethos, said that while a fiduciary rulemaking won't surface this year, “no one at the SEC is going to be foolish enough to say the fiduciary debate is over.”
Fiduciary duty will “always” be an issue for the commission to consider, Trone added, but “the role of the regulator is to define the minimum standard of care required.” The SEC's “idea of minimum standard” when it comes to writing a rule to put brokers under a fiduciary standard “won't come close to what the rest of us view” as the minimum standard.
Barbara Roper, director of investor protection at the Consumer Federation of America, agreed that while the SEC's “role is to define regulatory standards” and that the industry “is free to define higher, voluntary professional standards,” a minimum standard by the SEC “shouldn't imply that it can be a weak or minimalist standard.”
Section 913 of Dodd-Frank “authorizes the SEC to adopt a rule regarding the standard of conduct for brokers in certain situations—and that such standard ‘shall be the same as the standard of conduct applicable to an investment advisor under section 211 of the Investment Advisers Act,’” Tittsworth added.
“The industry has always been free to engage in practices that are arguably higher standards, but the question to me is: What is the rule of law?”
While admitting that Section 913 of Dodd-Frank “is a complicated provision,” Tittsworth said it's also clear that Dodd-Frank “authorizes the SEC to adopt a standard that is the same as the Advisers Act fiduciary standard.”
What Troubles RIAs
Many advisors have voiced concern that the SEC will come out with a fiduciary standard for brokers that is a watered-down version of the Advisers Act standard, one that could “tilt toward being disclosure-based as opposed to a true fiduciary standard of care for consumers,” said Schweiss.
Trone surmised that a disclosure-based rule will be the likely outcome. As far as the SEC is concerned, he said, a fiduciary standard will be satisfied “when all conflicts of interest are disclosed.”
After stating earlier this year that the SEC would make a “threshold decision” in 2014 on whether to proceed with a fiduciary rulemaking, SEC Chairwoman White directed SEC staff to come up with a fiduciary rulemaking “options” list.
Stephen Luparello, head of the SEC's Division of Trading and Markets, told members of the House Financial Services Committee in mid-June that the list of options that the SEC will consider is still being developed, and once that list is solidified the agency may request feedback on those options.
The SEC sought feedback from the industry last March about the potential impacts a uniform fiduciary standard of conduct or other regulatory approaches may have on retail investors and how any negative impacts could be mitigated. That feedback, Luparello said, resulted in “less” information than the SEC anticipated.
The “benefit” of a fiduciary rulemaking has to “stand up to the cost,” he told lawmakers at the June hearing, and said the commission continues to study that issue. There are “certain aspects of the fiduciary standard that do provide protection [to investors], but costs have to be weighed,” he said.
So the SEC's promised “decision” on a fiduciary rule by the end of 2014 could take many forms.
Indeed, Bob Plaze, the former deputy director of the SEC's Division of Investment Management, who's now a partner at the law firm Stroock & Stroock & Lavan in Washington, said that by stating the agency would make a “threshold determination” this year, White has “wisely not committed the commission to acting on a [fiduciary] rule.” Said Plaze: “There is blood in the water” at the commission regarding a fiduciary rulemaking, with “passions running high ... and commissioners on both sides of the issue.” The “major battle” of getting the commission to agree to a fiduciary rulemaking “detracts from other items on the [SEC's] agenda,” such as mandated rules under Dodd-Frank, which White has said are a priority.
Trone surmised that White “could say anything by year-end,” including that the SEC has decided to do another study or seek “more public opinion.”
White told me in mid-April that if the agency decided to move forward with a fiduciary rule, “there are a number of ways to do that.”
One way a “uniform” fiduciary standard for brokers and advisors could go is requiring that brokers “disclose their conflicts of interest and that advisors with less than X hundreds of millions of dollars” in assets under management register with the states, Trone said. “A uniform fiduciary standard could be that de minimis.”
Key September Dates
Knut Rostad, president of the Institute for the Fiduciary Standard, said that members of the Institute will meet with SEC officials this month. Events to be held by the Institute in September include a best practices board meeting and media briefing on Sept. 15, as well as three webinars.
The Institute will also launch a podcast during the month called “Best Interest Investing,” and will award Gary Gensler, former chairman of the Commodity Futures Trading Commission, with the Institute's 2014 Frankel Fiduciary Prize on Sept. 19.
A new book by Trone titled “LeaderMetrics: What Key Decision-Makers Need to Know When Serving in a Critical Leadership Role” will be released on Sept. 15. The book focuses on a framework that integrates the three subjects of leadership, stewardship and governance, which he said “defines an even higher standard of care than fiduciary.”
Trone argued that fiduciary rulemaking action by the SEC and DOL has been delayed due not only to “politicking and lobbying” by opponents, but also because there's been a lack of “new thought leadership” by fiduciary advocates. (Labor has pushed release of its redraft to amend the definition of fiduciary under ERISA to January 2015.)
Trone added, “You have the SEC and DOL sitting there saying, ‘We see people with pitchforks and torches, but they’re not saying anything new.’ You can't make the argument that brokers are bad and advisors are good and [think] that's going to carry the day.”