Deluge of Comment Letters Shows Industry Split on Fiduciary Standard

The 30-day comment period out of the way, the Securities and Exchange Commission is now setting to work crafting a study that will ultimately determine the standard of care that agents and brokers must use in selling investment products in the future.

Under the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that is governing its actions, the SEC will now have six months to complete a study on the fiduciary standard issue.

The provision in the law dealing with the issue then gives the agency the clear power to draft a new standard-of-care rule based on the findings of the report.

More than 2,700 comment letters were sent to the agency on the issue. But all the letters signaled is that there is no consensus within the financial services industry on the proper standard on sale of investment products, and whether a uniform study is necessary.

The divergence within the industry can be summed up by the comments of the National Association of Insurance and Financial Advisers and the Association for Advanced Life Underwriting on the one hand, and the Financial Planning Coalition on the other.

In its letter, NAIFA officials contend that eliminating the broker-dealer exclusion for its members could result in a substantial increase in “frivolous litigation” that could result in “catastrophic costs, likely forcing many of them to shut down their operations.

In its letter, the AALU argues that “the current level of regulation and oversight of insurance professionals when selling SEC-registered insurance products is distinct and should be taken into consideration by the SEC as it considers whether there are gaps or overlaps in regulation.”

By contrast, the Financial Planning Coalition contends that the SEC should adopt “a strong and uniform fiduciary standard of care for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers.”

It called the broker-dealer standard of care under the Financial Industry Regulatory Authority’s suitability rule “ineffective in protecting investors receiving personalized investment advice because it leaves substantial gaps in coverage when compared to the fiduciary standard applicable to investment advisers.”

Moreover, the coalition said, the fiduciary standard adopted by the agency should be uniform.