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SEC’s uniform fiduciary rule could ‘haunt’ advisors

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Creating a uniform fiduciary duty rule for brokers and advisors is a “deeply flawed” concept, and the Securities and Exchange Commission should instead create a “generalized obligation” for brokers that requires them to act in their clients’ best interest, Robert Plaze, the former deputy director of the agency’s Division of Investment Management, said Tuesday.  

“To put BDs and advisors in the same box [under a uniform fiduciary rule] is not going to work and will lead to problems,” most notably “diluting the current Advisers Act fiduciary duty,” Plaze, who’s now a partner at the law firm Stroock & Stroock & Lavan in Washington, told attendees Tuesday at TD Ameritrade Institutional’s Fiduciary Summit, held in Washington.

“A uniform fiduciary duty may come back to haunt the Advisers Act fiduciary duty,” Plaze said.

The competitive tension between the advisory and brokerage industries has “paralyzed” the SEC, Plaze said, partly because both groups have “camped out” on the “extreme” opposite sides of the issue. “To get anything done here [regarding a fiduciary rule] there has to be compromise,” he said.

He suggested that such a compromise should be that the SEC settle on a “broad obligation that broker-dealers act in the best interest of their clients” rather than trying to adopt a uniform fiduciary duty by a rule that would be necessarily a product of compromises with broker-dealers.

Plaze said in separate comments to ThinkAdvisor that “most of the enforcement actions brought by the SEC against investment advisors involve activities that would be or are also violations of rule 10b-5 or other provisions of the securities laws that broker-dealers are subject to.”

Both broker-dealers and advisors “have obligations to their customers that are significantly higher than most participants in the marketplace have to each other. Broker-dealer obligations to their retail customers are evolving and in many cases have been considered similar to those of an advisor,” Plaze said.

Indeed, Mercer Bullard, founder of Fund Democracy and associate professor at the University of Mississippi School of Law, said on a separate panel that a fiduciary rule by the Department of Labor “may be where all the action is,” as the SEC “doesn’t have the capability to decide the [fiduciary] issue one way or another.”

Arthur Laby, professor of law at Rutgers University, agreed that “it is very hard to make the [fiduciary] law identical for brokers and advisors,” but stated that brokers, “in some respect, have brought [the need for a fiduciary rule being applied to them] upon themselves” through their use of titles and advertising that he says create “a reasonable expectation that they would work under a fiduciary standard.”

Laby argued that investor confusion around what a fiduciary duty means will “never” be solved, but Karen Nystrom, director of investor advocacy for the Financial Planning Association, which supports putting brokers under the same fiduciary standard as advisors, added on a separate panel that while “there would still be confusion under a fiduciary rule … at least the client would be protected.”


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