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SEC Commissioner Defends Fiduciary Standard Expansion

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Luis Aguilar today defended the idea of applying a fiduciary standard of care to all advisors who give retail clients personalized investment advice.

Aguilar, a U.S. Securities and Exchange Commission commissioner, spoke in Washington at a conference for investment advisors.

The SEC wants all advisors who give investment advice to consumers to meet a fiduciary standard of care, which would require them to put the consumers’ interests with undivided loyalty.

Today, the government requires investment advisors to meet a fiduciary standard, but it requires broker-dealers, and life insurance agents affiliated with broker-dealers, to verify only that the products sold to consumers suit the needs of those consumers.

Broker-dealers and life agents have argued that the suitability standard fits their role, because they openly sell financial products for just one company, or a limited number of companies, and cannot necessarily sell consumers what appear to be the very best products of those products are not on the list of products that they are allowed to sell.

The Senate Banking, Housing and Urban Affairs has been working on a bill, the Restoring American Financial Stability Act of 2009 bill, that originally was going to appy a fiduciary standard to all providers of retail personalized investment advice.

The version of the bill approved by the committee earlier this week requires only that the SEC study the issue and report to Congress on its findings.

“It is incumbent on all of us — the SEC as the industry’s regulator and you as the compliance experts — to make sure that investors are protected,” Aguilar said today at the investment advisor conference, according to a copy of his remarks provided by the SEC.

“Recent events have deeply shaken investor confidence, and we all need to work hard to return to the bedrock principle that the capital markets should be known for their integrity and their fairness,” Aguilar said.

The fiduciary standard requires that “aAn adviser that has a material conflict of interest must either refrain from acting upon that conflict, or it must fully disclose all material facts relating to that conflict, and obtain the informed consent of its clients, before acting,” Aguilar said. “In addition, an investment adviser has the duty to seek best execution, to make suitable recommendations, and to have a reasonable basis for the investment advice that is provided to clients.”

Clients may be trusting the money for a first house or a child’s college education to the advisor, and “acting as a fiduciary is a profound responsibility,” Aguilar said.

“If you are giving advice to an investor, regardless of the title on the business card, you should always be bound to do so in the best interests of the client,” Aguilar said.

It makes sense for investors to assume that all professionals who give them advice would be subject to the same obligations, Aguilar said.

Aguilar said he thinks the language in the RAFSA bill that would have applied the fiduciary standard only to providers of “personalized investment advice about securities to a retail customer” was too narrow.

“This language limits the application of the fiduciary standard and excludes many investors from its protection,” Aguilar said.

But now, the Senate has abandoned that position “in the face of determined lobbying by the insurance and brokerage industries,” Aguilar said.

“This potential retreat from requiring a fiduciary standard for all who provide investment advice concerns me for several reasons,” Aguilar said. “First, I see no need to study the appropriate obligation for investment advisers. We already have a strong, workable standard that has done its job successfully for decades, and I would not support any attempt to weaken it.

“Second, as with the House Bill, I question why the protection of the fiduciary standard should be limited to ‘retail’ customers….

“Third, I question why the study, as well as the reach of the House Bill, should be limited to ‘personalized services.’

“Finally, I don’t believe that we need a study to conclude that investor protection requires that broker-dealers providing investment advice be subject to fiduciary duties. I think that question has long ago been asked and answered.”


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