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Practice Management > Compensation and Fees

A Tail is Not a Leg

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The Securities Industry and Financial Markets Association (SIFMA) testified before Congress October 6th that its views regarding the fiduciary standard are “pro investor.” In fact so very, very pro investor, that, casting humility aside, the K Street powerhouse concludes its “vision of a harmonized fiduciary standard is even stronger and more pro-investor than any other alternative.” Any alternative?

What is SIFMA’s fiduciary vision? In the testimony, John Taft, Head of U.S. Wealth Management, RBC Wealth Management, and Chairman of the SIFMA’s Private Client Group Steering Committee, says, “A fiduciary should also act with good professional judgment, and avoid conflicts of interest, if possible, or otherwise effectively manage conflicts through clear disclosure and, as appropriate, investor consent. These decidedly pro-investor, core principles lie at the heart of what it truly means to be a fiduciary.” To bolster the point, in a footnote, it claims brokers “are already subject to…core fiduciary principles.” These principles, according to SIFMA, are just and equitable principles of trade, suitability of recommendations, best execution, fair and balanced disclosure, supervision and training.

The Committee for the Fiduciary Standard’s review of SIFMA’s testimony was followed by some questions for Kevin Carroll, Associate General Counsel of the trade group, in a October 7 Webinar I participated in, hosted by Wealth Manager. Carroll’s responses to further questions were illuminating.

First, some context. The authentic fiduciary standard (AFS) is founded on the common law duties of loyalty, due care and utmost good faith. It’s been often called the “highest” standard in law. Justice Cardozo’s eloquence describing what is special about the fiduciary standard, “the punctilio of an honor the most sensitive…,” still rings loudly, 80 years later, in almost any serious discussion of the authentic fiduciary standard. (See, for example, The Rand Report.)

Are Justice Cardozo, The Rand Report and SIFMA in agreement? The authentic fiduciary standard demands the legal obligation of “prudence;” SIFMA’s standard does not. The AFS requires broad disclosures of all material facts; SIFMA’s does not. The AFS requires advisors to control investment expenses, to disclose and always attain fully-informed client consent before proceeding with a transaction if a conflict is identified, and to manage conflicts in the client’s interest. SIFMA’s standard, unfortunately, does not include any of these requirements.

The SIFMA fiduciary “vision” for brokers, as outlined in this testimony and further explained by Kevin Carroll last week, simply does not include acceptance of core fiduciary principles.

Do SIFMA spokespersons explicitly point out these deficiencies? Not exactly. Case in point. There is no mention in SIFMA’s testimony of any obligation to “control investment expenses.” In the Webinar I asked Carroll about this point, and he responded by refusing to say that SIFMA believes that under a fiduciary standard brokers must control investment expenses; he did say that all firms are concerned with keeping general business expenses down.

Case in point. There is no mention in SIFMA’s testimony of any obligation to disclose fees, expenses and compensation. In the Webinar I asked Carroll about this point and he responded by refusing to say that SIFMA believes fees, expenses and compensation must be disclosed. He did, however, suggest that the brokers’ different “business model” may permit brokers to NOT disclose compensation, fees and expenses, while, at the same time still fulfilling fiduciary disclosure obligations.

Case in point. The “core principles” that SIFMA asserts are “fiduciary” and brokers already meet are hardly so. While “best execution” is a quasi-fiducial duty, the remaining practices are decidedly a part of meeting the commercial standard. These are not unimportant tasks, but are also not fiducial in nature. No one who understands fiduciary duties can confuse training, for example, with a “core fiduciary principle,” and akin to duties of loyalty, due care, and utmost good faith. That would be like saying taking the Series 7 exam, important as it is, is a fiduciary principle.

Applying the authentic fiduciary standard to different business models will not be simple, it will be difficult in many respects, and will require creativity, time and patience. It will be a process, not an event. However, SIFMA’s issue is different. Accepting the principle that fiduciaries disclose compensation does not require undergoing a process. It requires accepting a duty. A duty to truly put a client’s best interest first, ahead of your own. Saying that it is otherwise, as Lincoln suggested, doesn’t make it so.

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 chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.

See more of Knut Rostad’s Regulatory Reason Blog posts:

SEC Chairman Speaking the Fiduciary Language September 28, 2009 SEC Chairman Mary L. Schapiro’s September 24th speech, before the Financial Services Roundtable, included her most recent public remarks on the fiduciary standard. The Chairman’s remarks are important. …

Rakoff’s Bank of America Opinion: “The Tipping Point”
September 16, 2009
In September 2013 when we look back on Lehman Bothers’ demise, will we also see a “reformed” financial system and regulatory structure? One that may be hard to recognize compared to today’s structure? If “yes,” look to Judge Jed S. Rakoff’s opinion. …

Listen to Chuck
August 31, 2009
When Chuck Schwab talks do people listen? They ought to–even when he is off base, as he was in an August 19 opinion piece, “Brokers Aren’t Responsible for Bad Bets,” in The Wall Street Journal….

Disclosures and Evoking the Lewis Liman Defense
August 14, 2009
Why did the SEC accept a $33 million settlement in light of its allegations that Bank of America failed to disclose that bonus payments were authorized for up to $5.8 billion? Judge Jed Rakoff wants to know. …

The Authentic Fiduciary Standard–What’s the Fuss About?
August 11, 2009
Recent discussion in some quarters has focused on the “similarities” between the fiduciary and “arm’s length” standards. The clear implication appears to be: What’s all the fuss about whether investors retain fiduciary advisors or not? …

Blog: Talking the “Fiduciary Talk” in Washington
July 07, 2009
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. How will this translate into legislation?…


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