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Regulation and Compliance > Federal Regulation > FINRA

Blog: Talking the "Fiduciary Talk" in Washington

By Knut A. Rostad

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Some words are clear enough. The Obama Administration proposes that brokers giving investment advice should meet a fiduciary standard. SEC Chairman Mary Schapiro states strong support for a fiduciary standard. What is not clear is how these expressions of fiduciary support will translate into legislation. Longstanding industry opposition will not just go home. Also, some policymakers suggest a fiduciary standard is an empty vessel to be filled as we please.

FINRA CEO Richard Ketchum has expressed support for a single standard, and added, “I think it makes sense for it to be a fiduciary standard,” according to a May 13 article in Investment News.

What he means or understands by a fiduciary standard (FS), however, is not clear. Ketchum’s said more than once that FINRA needs to explore “whether a properly designed fiduciary standard could be applied to broker-dealers’ selling activities.” He also speaks of FINRA’s “very detailed set of rules” and its “comprehensive examination and enforcement regime” as a prelude to his view of the strength of the suitability standard. It provides “a level of specificity over and above a fiduciary standard,” Ketchum said in the Investment News article. (He later clarified he did not mean the suitability standard was “higher” than the fiduciary standard.) Most recently, he stated in a June 17th speech to the Exchecquer Club In Washington, DC, that: “We agree with the Obama administration that a fiduciary standard should be established…(but)….the kind of additional protections provided to investors through the FINRA model are essential.”

Ketchum seems to focus on two points. First, the suitability standard may be better for brokers, and 2) whatever the FS means today may not be relevant, because what really matters is what a “properly designed” FS would mean for brokers in the future.

SEC Commissioner Elisse Walter, a veteran FINRA executive, has also suggested her support of a fiduciary standard…of sorts, saying, on May 5, in a speech to Mutual Fund Directors: “Every financial professional should be subject to a uniform standard of conduct,” that should require “all financial professionals to act as fiduciaries at all times.” Of regulations of investment advisors and broker/dealers, Walter says, “Both of these statutes provide a significant degree of protection for investors, but they come at it from different angles. As former Commissioner Nazareth put it, ‘they are two different means of arriving at the same end of investor protection. And that’s the point.’” The upshot: Walter seems to suggest it does not matter to investors whether either a FS or suitability standard is applied.

Against this industry backdrop, SEC Chairman Mary Schapiro surprised many observers when she rushed out one day after the Obama Administration released its proposal, and spoke before the New York Financial Writers’ Association forcefully and knowledgeably for a fiduciary standard. In that speech, Schapiro talked about what it means to be a fiduciary, to “at all times act in the best interest of…clients,” avoiding “conflicts of interest” and if such conflicts cannot be avoided, a “fiduciary must provide full and fair disclosure of the conflicts and obtain informed consent to the conflict.” And then she went on to say, “A fiduciary owes its…clients more than mere honesty and good faith alone. A fiduciary must put its clients’ and customers’ interests before its own, absent disclosure of, and consent to, conflicts of interest.”

Good news, bad news. The good news is the fiduciary movement is gaining attention and important expressions of support. The bad news is it is not clear how much this attention and support reflects a solid understanding of and support for the authentic fiduciary standard.

Knut A. Rostad ([email protected]) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia and a founder of The Committee for the Fiduciary Standard. The views expressed here are Mr. Rostad’s own and do not necessarily reflect views of the Committee.

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