Since the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, my primary focus of interest has been on the issue of fiduciary duty. As the bill was being finalized, I was at first ecstatic when the original proposal included what seemed to be a clear requirement that anyone providing advice be held to a ’40 Act fiduciary standard. When the lobbyists managed to insert a six-month study period, I became depressed;
When the SEC issued its study on the fiduciary duty, I was once again happy. However, when two of the SEC Commissioners criticized the study I was sent back to my state of depression; When the SEC, post study, seemed to reiterate its support of a substantive fiduciary duty, I was back to happy.
Unfortunately, I believe I was also naive.
According to some reports, Wall Street invested nearly $52 million in just the first three months of the year lobbying to whittle down or eliminate many of the Dodd-Frank provisions, including the fiduciary standard. As Mr. Bartlett, chief of the Financial Services Roundtable (one of the major Wall Street lobbying groups) so eloquently put it, “We are trying to reform the reform.” I think they’re succeeding. When Democratic Congressman Barney Frank, coauthor of the bill and now the ranking member of the House Financial Services Committee, wrote to the SEC Chair that “the requirement that the new standard be ‘no less stringent’ …was not intended to encourage the SEC to impose the Investment Advisers Act standard on broker-dealers …” David’s chances against the goliath of Wall Street seemed increasingly bleak.
Of SIFMA, Rules and Principles
The most recent grenade in the debate was SIFMA’s proposal to the SEC titled “Framework for Rulemaking under Section 913 (Fiduciary Duty) of the Dodd-Frank Act.” The title itself highlights what I believe is the major disconnect between those lobbying for a “new” fiduciary standard and those of us rooting for a substantive fiduciary standard; namely the reference to “Rulemaking.”
As SIFMA proposes in its Executive Summary, “The standard should be articulated through comprehensive SEC rulemaking…” and “The SEC would also issue rules and guidance to provide the detail, structure and guidance necessary to enable broker-dealers and investment advisors to apply the uniform fiduciary standard of conduct to their distinct operational models.”
But fiduciary obligations are based on principles, not rules.
The SIFMA proposal adds “The inability to gauge compliance with or legal exposure under the Advisers Act standard would undermine the broker-dealer business model.” To suggest that without rules the management of a fiduciary standard is impractical is absurd. Somehow RIAs have operated successfully since the ‘40 Act under a principles-based regulatory system. Furthermore, the ultimate question is this: Who should the law protect—investors or Wall Street’s business model?