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May 28, 2013 at 08:00 PM
Ever notice how the way some questions are worded can greatly affect the way they are answered? The classic question, of course, is the one that defines the whole: “When did you stop beating your wife?” Attorneys, marketers and salespeople are well-aware that leading questions can often elicit a desired response, such as: “What color do you want your new car to be?” or “How did you want to pay for those shoes?”
What’s more, studies have shown—and pollsters know—that providing hints within questions can skew the answers: Asking how tall a person is will more often than not get a larger estimate than a question about how short he is. Then there are more subtle questions that are not, in reality, questions at all. For instance, as every married man quickly learns, “Honey, do I look fat in these pants?” is not a request for an objective assessment.
These musings were prompted by the SEC’s March 1 release requesting “data and other information […] relating to […] the standards of conduct and other obligations of broker-dealers and investment advisors.” That’s Washington-speak for yet another round of comments about how the commission might go about acting (or not) on the already much-debated Dodd-Frank mandate to create a uniform fiduciary standard for brokers and possibly “harmonize” the way both industries are regulated.
What’s different about this request is that its wording has seemingly tipped the SEC’s hand a bit about the direction its deliberations are leaning, setting off a firestorm of responses. Perhaps the most articulate and pointed of those came from Institute for the Fiduciary Standard founder Knut Rostad, who wrote that if the positions “set out in the [SEC] release were adopted in rulemaking, the fiduciary standard would effectively be removed for brokers and advisors giving investment advice to retail investors.”
The central focus of Rostad’s and many others’ concerns about the SEC release is a list of 11 guidelines (some general and others specific to the “Duty of Loyalty”) that the Commission included “to establish a common baseline of assumptions.”
In his April 16 report titled “Fiduciary Reference: Analysis of Investment Fiduciary Issues,” Rostad offered a detailed response to the commission’s release, stating: “The SEC provides a picture of fiduciary duties that are far more restricted and far less stringent than the fiduciary duties required by the Investment Advisers Act of 1940. In a few short pages, this guidance effectively upends established legal precedent developed over 73 years.”
Rostad’s commentary focuses on four of the 11 assumptions outlined by the SEC, which he said “restrict the broad concept of advice implicit in the Advisers Act, permitting the waiver of fiduciary duties, framing disclosure as the optimum measure of loyalty, and omitting the strongest disclosure requirement (of informed consent).”
One of these assumptions redefines who would and would not qualify for fiduciary protection: “Assume that the term ‘retail customer’ […] is a natural person, or the legal representative of such natural person, who receives personalized investment advice about securities from a broker or dealer or investment advisor; and uses such advice primarily for personal, family or household purposes.”
That greatly narrows the kind of clients who are currently protected under the Advisers Act. “For example,” wrote Rostad, “recommendations made to individuals regarding their business or non-profit organization assets would not necessarily be required to be fiduciary advice and, thus, not be required to be in the best interest of the client.”
Then there’s the assumption under which the commission sets out its business neutrality: “Assume that the uniform fiduciary standard of conduct would be designed to accommodate different business models and fee structures of firms, and would permit broker-dealers to continue to receive commissions.” I suspect that for most observers this is reasonable as far as it goes; even those who would prefer to see the conflicts inherent in commissions eliminated altogether probably didn’t expect that to happen. However, the SEC’s assumed remedy for the conflicts of commissions and principle trading are cause for more concern: “At a minimum, a broker-dealer or investment advisor would need to disclose material conflicts of interest, if any, presented by its compensation structure.” [Emphasis added.]
