(This article first appeared on WealthManagerWeb.com on May 20.)
Investor advocate Mercer Bullard is concerned about the impact of financial reforms that are intended to help investors. One reform in the Senate bill, which passed, 59-39, on Thursday, May 20, that had been debated the past week is an extension of the fiduciary standard of conduct to broker/dealers who provide advice to investors, requiring them to act as fiduciaries and, as such, to put investors’ interests before their own. He shared some of his concerns with Wealth Manager Editor in Chief Kate McBride in an exclusive interview after he spoke at the fi360 conference in Orlando on May 7.
A University of Mississippi School of Law Associate Professor of Law, Bullard is a tireless pro-investor voice in letters to regulators and testimony on Capitol Hill. He is founder and president of Fund Democracy, a non-profit investor advocacy group for mutual fund investors.
Bullard was formerly an SEC assistant chief counsel, and securities lawyer at Washington, DC-based WilmerHale (formerly Wilmer, Cutler & Pickering). Currently, he is a member of the SEC’s Investor Advisory Committee, formed last year as part of the SEC’s investor protection mandate. The Committee’s latest meeting was May 17 at the SEC’s offices in Washington. Bullard is chair of a subcommittee of that SEC group, the Investor as Purchaser Subcommittee.
One of Bullard’s worries is that the fiduciary standard will become diluted in the course of being applied to brokers–if the legislation passes. Bullard defines fiduciary duty as “a duty to act solely in the interest of the client.” Broker/dealers are currently subject to the less-stringent “suitability” standard of conduct, requiring that their sales of investments be suitable to the investors’ goals, but they are not required, in most cases, to act in their client’s best interest. They can select the investment–say one of two stock funds–that pays them the most in commissions, or makes the firm the most money, even if that impacts the performance of that investment.
The higher “fiduciary standard” that investment advisors are held to under the Investment Advisors Act of 1940 requires, according to The Committee for the Fiduciary Standard, that they adhere to five core principles;
o Put the client’s best interests first
o Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
o Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
o Avoid conflicts of interest
o Fully disclose and fairly manage, in the client’s favor, any unavoidable conflicts
This editor is a member of the Committee for the Fiduciary Standard.
In addition, Bullard asks: Who will regulate everyone who would fall under the fiduciary standard of conduct? He cites a “gaping regulatory hole [and] absence of effective oversight,” due to an “inadequate SEC inspection program” for investment advisors. He suggests a fee that is specially “earmarked” for investment advisor exams could help close the gap.