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October 21, 2011 at 04:58 AM
David Tittsworth, executive director of the Investment Adviser Association, told Retirement Income Symposium (RIS) attendees in Boston on Monday that the SEC will probably issue its long-delayed ruling on whether it will extend a fiduciary responsibility in the first quarter of 2012.
At stake is the question of whether FINRA-regulated broker-dealers, now bound by a rules-based suitability standard that doesn’t require disclosure of conflicts of interest, should be governed by the same principles-based fiduciary duty as investment advisors.
In his presentation, “Fiduciary: The Issue That Keeps On Giving,” Tittsworth (left) walked the nearly 200 attendees of the RIS through a brief history of fiduciary duty from its origins in English common law, where a harsher sentence was given to culprits who used superior knowledge to take advantage of a helpless victim.
In the U.S., the long and winding road to a mandated standard of care began with the Investment Advisers Act of 1940, which he said imposed a “duty of care, loyalty, honesty and good faith” on investment advisors. In 1963, the Supreme Court ruled that the Act’s fiduciary duty requirements applied to all investment professionals unless advice was incidental to their primary business, and no “special compensation” (i.e., anything other than a commission) was received for advice.
Although this decision was affirmed in subsequent court decisions and SEC rulings, disputes have arisen in recent years, Tittsworth recalled:
- 1999: The SEC proposed the Merrill Lynch rule, making discretion over client assets (instead of form of compensation) essential in order for fiduciary responsibility to apply
- 2005: The SEC approved this ruling in a split decision
- 2007: The rule was invalidated by the District of Columbia Circuit Court following a lawsuit by the Financial Planning Assn. (FPA).
- 2008: The SEC hired the RAND Corp. to study the issue. Their key finding: investors were confused.
- 2009: In a Treasury Department “roadmap,” Treasury Secretary Tim Geithner recommended that broker-dealers who provide advice should meet the same fiduciary standard as registered investment advisors, upsetting B-Ds and insurance companies who saw his definition as too broad
- 2010: Dodd-Frank Section 913, a compromise, provided that when B-Ds provide personalized investment advice to a retail customer, they would be governed by the same standard as investment advisors
- 2011 (January): The SEC recommended a common standard for B-Ds and RIAs, touching off arguments that an adequate cost/benefit analysis had not been done
- 2011 (Sept. 14): At a hearing on Dodd-Frank Section 913, broker-dealer groups and insurance groups opposed extending the fiduciary standard to non-investment advisors
Now, Tittsworth said, members of Congress are urging the SEC to focus on some of the many other Dodd-Frank provisions that need to be implemented. At any rate, the ball is in the SEC’s court. Performing a cost/benefit analysis is likely to delay the final ruling, originally projected for year-end 2011, into the first quarter of 2012.
