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Regulation and Compliance > Federal Regulation > SEC

Clark at Large: Time to Represent, Advisor Leaders!

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Now that The Dodd-Frank Wall Street Reform and Consumer Protection Act has been signed into law, the media dissection of the 2,300-plus-page bill is well underway. One theme recurring in many analyses is that rather than reforming the nation’s financial regulation, Dodd-Frank has vastly increased the powers of the same regulators who oversaw the mortgage meltdown in the first place, namely The Federal Reserve, the Department of the Treasury, and the Securities and Exchange Commission.

As a June 28 Op/Ed piece in The Wall Street Journal put it: “The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.”

Of particular interest to the retail financial advisory corner of the world is the mandate given to the SEC. At the conclusion of some 20 directed studies, the Commission has the authority to potentially write 95 or so new rules, including, as stated in Section 913, “…rules to provide that, with respect to a broker or dealer, when providing personalized investment advice about securities to a retail customer, the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment advisor under section 21 of the Investment Advisers Act of 1940.”

Can this really mean that the most sweeping reform of financial advice to consumers in the history of our Republic will be left entirely to the discretion of the SEC? That’s the way I read it, and I’m far from being alone. As advisor, attorney, and NAPFA board member Ron Rhoades wrote in a response to my July 26 blog on “The Dodd-Frank Act likely provides enough authority to the SEC to both raise the standards of conduct for B/Ds and/or lower the standards of conduct for RIAs.”

The Opportunity to Influence

Many of us who support a fiduciary standard for everyone who offers financial advice to the public were openly disappointed by this Congressional handoff to the SEC. Yet there might be a silver lining in Congress’s not-so-surprising willingness to pass the buck on such a crucial–and controversial–issue. We now have an unprecedented opportunity to influence such a sweeping reform. “What is most notable about this new era,” wrote the folks at Fi360 in their July 28 blog, “is the opportunity for the public to provide input that could shape new regulations.”

You’re probably way ahead of me on this, but unfortunately, that “input” isn’t limited to just the public. As you might imagine, as I write this column, laptops at financial industry lobbying firms all over Washington are undoubtedly overheating in their efforts to crank out well-researched, seemingly well-supported, and oh-so-persuasive tomes designed to marginalize or neuter a fiduciary standard for brokers. Lamented Rhoades: “Do we modify the fiduciary standard to fit B/D practices, or do we modify practices to fit the law? [...] I tend to be pessimistic, having seen the vast influence moneyed interests possess over both Congress and many of the agencies of our government. I foresee the gradual erosion of the fiduciary standard.”

I tend to be more optimistic. Based on many comments made over the past year, SEC Chairman Mary Schapiro and the other four Commissioners seem to believe that the time has come for a real fiduciary standard for brokers who provide advice to the public. Dodd-Frank has given them the opportunity to do the right thing–and make history. But they’re going to need help in resisting the seductive pressure the financial and insurance firms will exert to maintain the status quo of the current, very lucrative, sales-oriented industry.

What You Should Do

For the most part, independent advisors can’t play much of a role in this, the comment phase of the regulatory process. What advisors can do is join, get involved with, and even pressure the various independent advisor organizations to publicly–and actively–support a genuine fiduciary duty for all advisors. The FPA, NAPFA, the Committee for a Fiduciary Standard, and even the CFP Board (well, it’s possible) can have a major impact though well-reasoned, consumer-oriented papers, and through media campaigns to keep the fiduciary issue on the public’s mind, and in leading news stories.

Here’s how Rhoades put it: “There will be many attempts to sway public opinion, and the views of policymakers–often with arguments which are inherently deceptive in nature. The challenge for all reasoned people involved in the debates ahead is to point out arguments (on either side), which lack substance, and to advocate for greater understanding of the many issues and principles, which deserve attention.”

To get the attention of the SEC and the media, the independent advisory profession through its elected representatives needs to address the issues that will not only resonate with the media and the public, but that anticipate attempts by the financial industry to render a fiduciary standard meaningless. A clear definition of an advisor’s fiduciary duty is essential (acting in the client’s best interest at all times, and all that entails), as well as the kinds of clients who are afforded such a duty.

The Specific Issues

There are also more specific issues regarding how and when a fiduciary standard will apply that can greatly undermine the spirit of the principle. Two of these are already addressed in Dodd-Frank itself–proprietary products and limitations on advisory relationships–but they are far from dead issues. “The sale of only proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the ['40s Act RIA] standard…” is how the new law deals with this potentially abusive practice. It seems reasonable as far as it goes: that recommending proprietary products isn’t necessarily harmful to a consumer. (Perhaps not coincidentally, this is essentially the same position that the CFP Board takes on the subject.)

Because proprietary products represent such a major conflict of interest, surely further standards of how they should be handled are warranted. For instance: How competitive do the loads and fees have to be to be considered fair? Then there’s the clause in Dodd-Frank Section 913 regarding the scope of an advisory relationship: “Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.” To my mind, this is a make-or-break condition of the fiduciary standard: It could go either way, depending on the SEC’s definitions.

If an advisory relationship is limited to only a portion of a broker’s interaction with a client, we haven’t changed the current, confusing mess in any meaningful way. If, on the other hand, by taking an ongoing fee, paid quarterly on assets under management, a broker is deemed to be continually providing investment advice, then he or she has an ongoing fiduciary relationship, as well. These kinds of determinations about when an advisory or a sales relationship exists will dictate whether financial consumers receive additional protections under Dodd-Frank or whether they don’t.

These and many other issues will need to be persuasively addressed if the SEC is going to arrive at a truly consumer-oriented fiduciary standard for brokers. Professional independent advisors who already accept such a duty to their clients are the logical, and most powerful group, to advocate the fiduciary standard.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].


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