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Industry Spotlight > Broker Dealers

Pressure mounts to apply fiduciary duty to all broker-dealers

By Elizabeth D. Festa

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The fiduciary duty should extend to all broker dealers when they offer investment advice about securities to retail customers, said a group of advisors, financial planners and consumer advocates in a letter to the Securities and Exchange Commission last week.

The letter, whose signatories included the Investment Adviser Association, the AARP, the Consumer Federation of America and the Financial Planning Association, among others, was addressed to SEC Chairwoman Mary Shapiro was an effort to weigh in on extending the Investment Advisers Act of 1940 to all broker-dealers.

The groups support the SEC staff study in January 2011 that would adopt parallel rules imposing a fiduciary duty on broker-dealers, including those in the broker-dealer units of insurance companies selling proprietary products, and investment advisers is consistent with the Dodd-Frank Act.

The SEC will likely propose its regulation for a uniform fiduciary standard this year. Schapiro said she still strongly believes that putting brokers under a fiduciary mandate is the direction that the SEC needs to go in, despite demands by insurance agents that the proposal be “business-model neutral.” That is, continuing to allow insurance agents to sell a limited number of proprietary products from the broker-dealer unit of insurance companies.

Members of the broker-dealer community have fretted that imposition of a fiduciary duty on brokers’ personalized investment advice could have catastrophic consequences – forcing them as agents  to abandon commission-based compensation, proprietary sales, or transaction-based recommendations.

Nonsense, the groups told the SEC.

“One need only look at longstanding practices under the Advisers Act as applied to dual registrants and to financial planners who are registered as investment advisers for evidence that the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products, and sale from a limited menu of products,” the letter stated.

Of course, the advisors want all agents to abide by a level playing field of the fiduciary standard. 

The groups also doesn’t want a new, or a separate and distinct rule from the general fiduciary but rather extended using principles-based fiduciary rulesmaking.

“…the goal in writing the new rules should be to extend the existing Advisers Act standard to brokers, while clarifying its applicability in the context of broker-dealer conduct, rather than to replace the Advisers Act standard with something new and different,” the letter stated. 

Securities Industry and Financial Markets Association (SIFMA) had suggested that traditional types of broker-dealer product sales (such as sale of proprietary-only products or limited range of products) or compensation arrangements (such as receipt of compensation based on commission or other standard forms of compensation) should automatically be deemed not to violate the fiduciary standard if  appropriately disclosed, the letter pointed out.

“While we agree that it is appropriate for the Commission to deem certain such practices as not, in and of themselves, inconsistent with a fiduciary duty, there are limits to this approach,” the letter said.

The legislation makes clear that sale of proprietary products or sale from a limited menu of products shouldn’t to automatically violate the fiduciary standard,  but it does not follow that a recommendation from that limited menu of products should automatically be deemed to satisfy the best interest standard for each and every customer as long as the limitation is disclosed, argued the group.

Furthermore, the Commission may determine that certain sales practices, conflicts of interest, or compensation schemes are “contrary to the public interest and the protection of investors,” in which case disclosure alone would not resolve the issue.”

But agent commissions are not automatically violations of fiduciary duty, the groups opined.

“…as long as the Commission retains the ability to take action against conduct that is not in the best interest of investors, we support an approach that affirms that certain traditional brokerage practices and compensation arrangements do not in and of themselves constitute violations of the fiduciary duty.”

There is concern that any proposal changing the current standard of care in selling investment products will be challenged in court by parts of the industry that oppose such changes.

An SEC rule implementing a proxy access standard was thrown out by a panel of the U.S. Court of Appeals for the D.C. Circuit last year because of a finding that the potential impact on capital formation and competition was not extensively weighed by the agency in the rule.

Barbara Roper, director of investor protection for the Consumer Federation of America, earlier said she doesn’t believe the issue will be resolved this year.

“Given everything the agency has on its agenda, I think it is all but guaranteed we won’t see any final rulemaking on this issue before the election,” Roper said.

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