Breach of Fiduciary Duty Most Common FINRA Complaint

Stanley of Americans for Financial Reform cited during his remarks that the SEC staff study on putting brokers under a fiduciary standard as mandated under Section 913 of Dodd-Frank “contains extensive documentation” regarding investors’ inability to understand the difference between a broker and an advisor. He argued that the principles-based fiduciary standard under the Investment Adviser Act of 1940 is “inherently flexible and it can be adopted by brokers.” But, he said, “we have to make sure that flexibility doesn’t mean watering down” such a standard.

This is where the biggest sticking point lies—putting brokers under the Advisers Act fiduciary standard. Kevin Carroll, managing director and general counsel for the Securities Industry and Financial Markets Association (SIFMA)—Wall Street’s trade group—declared from the audience that the panels at the event jointly held by the Institute for the Fiduciary Standard and the CATO Institute were behind the times and asked, “How do you implement a fiduciary standard” for brokers? “We don’t want the [Investment Advisers Act of 1940] standard imposed on us,” he told the panelists. The issue now is: “How do you articulate a [fiduciary] rule for both industries?”

Former SEC Chairman Harvey Pitt, who sat on the same panel with Stanley, agreed that “many customers don’t understand the differences in suitability [standard for brokers] versus fiduciary duty and many lawyers don’t either.” But Pitt argued that a fiduciary standard can be “simple” and not result in a voluminous regulation like the Dodd-Frank Act. Pitt told me in a separate interview that he believes brokers should be held to the same fiduciary standard as advisors, but “with carve outs.” The real “issues,” he said, “are what services the professional is providing and what are the customers’ expectations.”

Pitt stated in his comments during the panel discussion that “if all you do is execute a transaction, not [make] a recommendation, you can define that in fairly simple terms.”

However, Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, another panelist with Pitt and Stanley, argued that “brokers have always been fiduciaries under state common law.” If an advisor or broker is providing “personalized investment advice you are a fiduciary—period.” And, he said, the advisor or broker “must ensure that the client understands” that fiduciary standard. “Any educated investor is going to insist on the fiduciary standard,” Rhoades said.

While SEC Chairwoman Mary Schapiro told me in a previous interview that the agency’s fiduciary rulemaking is moving forward internally, Rhoades said what’s holding up the process is two of the five SEC commissioners’ reluctance to release the final request for comment from the agency economists regarding the SEC’s economic analysis of a fiduciary rule.

But Schapiro will more than likely not be at the helm of the agency next year, raising yet another question mark on when, or if, a fiduciary rulemaking process will move forward. If Daniel Gallagher’s comments are any indication—the newest SEC commissioner—a fiduciary duty rule for brokers isn’t high on the agency’s agenda.