S. 3217: Industry Sweats Proposed Fiduciary Model

An industry lawyer who asked not to be named said the fiduciary issue was the critical one for agents.

He was talking about an amendment to the legislation proposed by Sen. Robert Menendez, D-N.J., and Sen. Daniel Akaka, D-Hawaii. That change would impose a fiduciary standard on the sale of all investment products by broker-dealers, changing current bill language calling for a study of the issue by the Securities and Exchange Commission.

“The big danger [to imposition of the fiduciary standard] is the uncertainty,” the attorney said. “We don’t know what ‘fiduciary’ means in the case of a broker-dealer selling annuities and other hybrid products regulated both at the state and federal level. We just don’t how it might work in this area, creating anxiety for both the practitioner and the agent speaking to a client.”

Moreover, there would be additional costs for compliance and potential liability, he said. Because the liability is unknown, it would lead to increased expenses in D&O coverage.

“And the transition will be expensive, with practitioners and agents having to determine how to comply and what we will need to do to comply,” he said. “The scary part is the day-to-day compliance and the danger of liability, which ties in with the fact we don’t know what the term [fiduciary standard] means in this context.” he said.

The current language in the bill calls for the SEC to undertake a study to determine appropriate obligations of brokers, dealers, investment advisers, and their associates for providing personalized investment advice about securities to retail customers.

The current language would mandate the SEC to provide a report to Congress within 18 months. The amendment would also give the agency the authority to impose new rules dealing with the issue, based on its findings.

But in a letter at mid-week to members of the Senate, the Financial Planning Coalition said criticism of the fiduciary standard was misleading. The coalition noted that members of the industry alleged the standard would drive insurance and brokerage firms out of business and deny investors access to important insurance and securities products.

“Based on our experience, these statements are simply not true,” the group’s letter said. “Those Coalition financial planners who sell insurance and securities products to clients have a track record of successfully doing so under a fiduciary standard of care.”

Mandating a fiduciary standard for the sale of investment products “would not require securities brokers or insurance producers to charge fees for their services,” the letter argued. “The legislation explicitly protects commission-based compensation. Those Coalition financial planners who charge commissions adhere to the fiduciary standard by managing conflicts of interest and disclosing commissions to clients.”

Moreover, mandating use of the fiduciary standard “would not prevent securities brokers or insurance producers from offering a limited menu of products,” the letter said.

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