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March 01, 2011 at 07:00 PM
Now that the euphoria (in some quarters) that followed the SEC’s Jan. 21 release of its “groundbreaking” Study on Investment Advisors and Broker-Dealers has waned a bit, it’s time to take a more somber look at what this much-awaited document says—and what it doesn’t say. I have to admit to a strong sense of optimism upon my initial read of the Study; which after reflection, I now suspect was driven as much by relief as anything else.
I suspect that was a reaction shared by many who believe financial consumers would be far better served by the Dodd-Frank Act’s mandate that brokers be subject to the same duty of client care that is currently required of investment advisors. In the months leading up to the release of the Study, it was beginning to feel as if the SEC’s commitment to a strong fiduciary standard for brokers was wavering under relentless pressure from the brokerage industry. So, when the SEC Study finally came out, containing what appeared to be strong support for a ‘40s Act-type standard for brokers, we all breathed a collective sigh of relief.
But does the Study really say what it appears to say at first blush? Although it doesn’t say “no” to a fiduciary standard for brokers, does it really say “yes?” The few lines that have received most of the attention certainly sound promising. Yet, there is plenty of room for other ideas—perhaps even conflicting ideas—and other perspectives that may not be internally consistent. Perhaps most troubling, the Study isn’t a statement by the commissioners themselves; it came instead from the SEC staff in the form of recommendations that the commissioners can either accept or reject as they see fit. After further consideration, I can’t help but wonder if, in the cacophony of premises and analyses that make up the Study, the key point doesn’t get lost: that people who give investment advice to the public should be required to put their clients’ interests first, and people who don’t accept that duty of care should not be allowed to masquerade as if they do.
The causes for celebration, or at least relief, among proponents of a strong fiduciary standard for everyone who provides retail investment advice are stamped throughout the Study. Part IV: Analysis and Recommendations, captures the heart of it: “First, the Staff recommends that the Commission engage in rulemaking specifying a uniform fiduciary standard of conduct that is no less stringent than currently applied to investment advisers under Advisers Act Sections 206(1) and (2) that would apply to broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers.” That is, there should be one standard for everyone who gives investment advice, and it should be at least as strong as the fiduciary standard that investment advisors currently have under the ‘40 Act.
Understandably, the reaction of advocates of a strong fiduciary standard across the industry was extremely favorable:
• fi360 commented in its blog on Jan. 24: “We are pleasantly surprised and heartened by the strength of the report’s analysis… . The numerous references to the twin duties of loyalty and care as a basic framework for any rulemaking are an encouraging sign that the SEC recognizes the special responsibility entrusted to a fiduciary.”
• The Committee for The Fiduciary Standard: “The SEC staff has written an excellent study which reflects a keen understanding of the differences between the suitability and fiduciary standards… . This study is a bold blueprint and provides an excellent foundation for the rulemaking to follow, where the standard will be shaped.”
