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Industry Spotlight > Broker Dealers

FSI Supports a Universal Standard of Care for Financial Advice

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The Financial Services Institute (FSI), the lobbying and policy advocacy voice for independent broker-dealers and their affiliated financial advisors, has issued a statement on October 6 urging the House Financial Services Committee to apply a new universal standard of care to broker/dealers in addition to investment advisors under the proposed Investor Protection Act of 2009 (IPA).

The FSI comment, issued by Dale Brown, the group’s president and CEO, stated, “We are suggesting another approach to harmonization of broker/dealer and investment advisor regulation that will work for all client situations, and across the broad spectrum of industry business models. As currently drafted, the proposed legislation seeks to make the fiduciary standard designed for Registered Investment Advisors, now under oversight of the SEC, also applicable to all financial advisors in the broker/dealer industry, without regard to important differences between these business models. Ultimately the proposal falls short of real protection for middle class retail investors for the following key reasons:

? The core issue the proposal attempts to resolve – bringing clarity to investors over the difference between investment advisors and broker-dealers – will not be addressed through the adoption of an arcane and opaque fiduciary duty as the standard of care for those dispensing investment advice;

? The term ‘fiduciary standard’ is subject to a variety of different legal definitions that fail to provide investors clarity as to the specific duties owed to them by their financial advisor;

? Imposing the so-called ‘fiduciary standard’ will have the unintended consequence of limiting middle class investor access to financial advice, products, and services by increasing costs and raising other barriers to entry;

? Any standard of care that is applied to all financial advisors must be combined with vigorous and effective enforcement to bring about real reform of financial services regulation.”

The statement goes on to note that FSI supports the creation of a new “universal standard of care” focused on the middle class investor and applicable to both RIAs and B/Ds. The organization notes that the standard it would support would ensure transparency of business relationships, place the interests of the client at the forefront, avoid material conflicts of interest whenever possible and obtain informed consent when such conflicts are unavoidable, and provide advice based on information known about the client’s investment objectives, risk tolerance, financial situation and needs.

FSI also stresses the need for an efficient and effective regulatory examination and enforcement program as part of any reform effort. “Many of the financial advisors involved in recent high-profile fraud cases, such as Bernard Madoff, were subject to a ‘fiduciary standard,’ and yet were able to engage in fraudulent activities for years, due to the lack of effective, regular and vigorous oversight of their activities,” the statement notes.

In the statement’s conclusion FSI throws its support behind “the creation of an industry-informed, self-funded regulatory authority dedicated to effective supervision, timely examination, and vigorous enforcement of both registered investment advisers and broker-dealers.”


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