Podcast Center
Video Center
Webcasts
Resource Center
Events
December 12, 2011 at 08:47 AM
SEC Chairman Mary Schapiro’s recent comments in the media about the Commission’s objective to develop a uniform fiduciary standard that is “business-model neutral” have caused quite a stir. They should not, if SEC rule-making remains true to Dodd-Frank and the plain meaning of its plain language. Consistent with Dodd-Frank, the standard should be “no less stringent than the standard applicable to investment advisers.”
“Business-model neutral” has come to refer to brokerage practices explicitly not banned under Dodd Frank, such as commission-based compensation or only offering proprietary products. Either practice does not, “in and of itself” violate the uniform fiduciary standard. The SEC staff “Study on Investment Advisers and Broker-Dealers” notes that these provisions “should not prohibit, mandate or promote particular types of products.” “Business-model neutrality” then is essentially “neutrality” regarding “types of products,” not neutrality regarding individual transactions which are evaluated on their individual merits.
Fiduciary law scholar Tamar Frankel notes fiduciary law has survived through the centuries because it is “open-ended” and can “accommodate new situations and changes in social morals and norms, yet maintain its core values and norms, without which no society can survive.”
The essential and widely acknowledged fiduciary values are evident in the duties of loyalty, professional judgment and good faith. Fiduciary law exists to restrict the discretion of experts in relationships of trust and confidence. Fiduciary loyalty means, essentially, to adopt the client’s ends or objectives in order to mitigate the widely acknowledged and large information asymmetry between the expert and the investor.
SEC rulemaking on Section 913 of Dodd-Frank will determine if core fiduciary values permeate a uniform fiduciary standard, or not. Whether the rationale for fiduciary duties—to restrict the discretion of experts who render advice in relationships of trust and confidence— is adopted , or not. As well, whether the magnitude of information asymmetry between investors and investment professionals, so thoroughly documented in independent research, is reflected in the stringency of the rules, or not.
The Securities Industry Financial Markets Association (SIFMA) argues vigorously for “business-model neutrality” in SEC rule-making and, through repeated statements, that “the guiding principle that underpins this uniform standard is to act in the best interest” of the investor. SIFMA’s emphasis on securing the investor’s best interest is stressed in comment letters and Congressional testimony.
Thus, SEC rule-making that is both “business-model neutral” and in an investor’s best interest should permit many specific transactions where the conflict can be managed; it should not permit specific transactions where a material conflict of interest clearly indicates the transaction is not in the investor’s best interest, and the advisor or broker is unable to manage or mitigate the conflict to make the transaction in the investor’s best interest. The conflict—which may be accompanied by measureable attributes that include increased investment expenses, or lower investment quality or greater risk exposure, as compared to alternative available investments that are otherwise similar—cannot be permitted regardless of the method of compensation.
Further, such a transaction marred by a clear and present material conflict cannot be easily justified by a disclosure, even one that receives an “intelligent, independent and informed” consent.
