Close Close

Industry Spotlight > Broker Dealers

Despite SIFMA Talk, Caveat Emptor Lives

Your article was successfully shared with the contacts you provided.

The Securities Industry and Financial Markets Association (SIFMA) says that it would support a “new federal fiduciary standard for broker-dealers and investment advisers who provide personalized investment advice,” according to a July 17 announcement.

The devil’s in the details however, in whether a “federal” fiduciary standard and disclosure requirement will water down the standards as they exist currently for investment advisors and ERISA fiduciaries. Carve outs and exemptions are another avenue that can enable the SIFMA version of the standards to look tough, but in fact be weaker than the fiduciary standard that exists now, based on centuries of English common law–and making the “federal fiduciary standard of care that supersedes and improves upon existing fiduciary standards” look a lot like the suitability standard the broker/dealers are operating under now.

In testimony scheduled for July 17, before the House Financial Services Committee, SIFMA EVP Randolph Snook will speak about SIFMA’s stand on the Obama administration’s proposals for financial re-regulation. Of particular interest to wealth managers are comments about “harmonization” of investment advisor and broker practices regarding fiduciary duty to clients, and “new” and “improved” standard of care for individuals.

Some people might argue that eight centuries of fiduciary common law don’t really need to be improved, but rather embraced.

While Snook’s testimony sounds like SIFMA’s talking the right talk, a close read reveals many parts of SIFMA’s plan in which investor protections can be signed away or exempted. He says: “Individual investors deserve-and SIFMA strongly supports-a new federal fiduciary standard of care that supersedes and improves upon the existing fiduciary standards, which have been unevenly developed and applied over the years, and which are susceptible to multiple and differing definitions and interpretations under existing federal and state law.”

Snook’s testimony (to see the prepared remarks, click here) leaves open the question of dual hats and exactly when brokers would be providing advice and when they would not: “When broker-dealers and investment advisers engage in the identical service of providing personalized investment advice about securities to individual investors, they should be held to the same standard. Conversely, when broker-dealers are not providing personalized securities investment advice to individual investors (such as, for example, when broker-dealers simply execute orders for customers, or engage in market-making, underwriting or providing cash sweep services), there is no cause for modifying the existing, extensive regulatory regime that governs broker-dealers. We therefore welcome Treasury’s newly proposed legislation, the “Investor Protection Act of 2009,” which appears to acknowledge these important distinctions, and which would give the SEC the authority to establish rules for a new, uniform, federal standard.”

“Any new legislation, however, should make clear that subjecting a financial professional to the new federal standard does not create any presumption that the financial professional is providing investment advice or is a fiduciary for purposes of any other federal or state laws. This enables broker-dealers to continue to provide investors choice of investment products, particularly in IRAs.” Really? So if financial professionals operating under a new “improved” standard are not “providing investment advice” then just what, exactly, are they doing? And just whom do these improvements benefit? Not individuals, it would appear.

“We also hope that harmonization would involve a reaffirmation that pre-dispute arbitration clauses in advisory and brokerage contracts are valid. In the past, the SEC has prohibited the inclusion of such clauses in advisory contracts on the grounds that they may confuse clients by causing them to believe they have waived their rights under the federal securities laws, which would violate the antifraud provisions of the Investment Advisers Act of 1940.” Well, alright, then, this seems to change nothing–just affirms the status quo.

Ron A. Rhoades, an attorney and Director of Research, Chief Compliance Officer and Private Wealth Manager at Joseph Capital Management, LLC rebuts the SIFMA stand, here.

In addition to SIFMA’s Snook, other industry figures testifying today before the House Financial Services Committee in the Industry Perspectives on Reform Proposals hearings include: Richard Baker, President of the Managed Funds Association; William J. Brodsky, Chairman and Chief Executive Officer of the Chicago Board Options Exchange; Paul Schott Stevens, President of the Investment Company Institute; Douglas Lowenstein, President of the Private Equity Council; Diahann W. Lassus, President of Lassus Wherley on behalf of the Financial Planning Coalition; and Rob Nichols, President and Chief Operating Officer of the Financial Services Forum.

This topic has generated a great deal of healthy discussion. invites your comments to continue the conversation. Please send them to [email protected].

Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.