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March 25, 2015 at 09:39 AM
SEC Chairwoman Mary Jo White’s remarks last week at SIFMA’s Legal and Compliance Seminar in Phoenix has generated a fair amount of optimism among advocates for a “’40 Act equivalent” fiduciary standard for retail brokers. As reported by Melanie Waddell, in her March 17 ThinkAdvisor story SEC Chief White Backs Fiduciary Rule for Brokers, White told the securities industry group that the SEC should “act: on a uniform fiduciary standard for brokers and investment advisors. That standard, she said, should be “codified, principles-based and rooted in the current fiduciary standard for investment advisors.’” Yet while she hit the high points that are near and dear to fiduciary supporters’ hearts, the rest of White’s remarks left just enough wiggle room to dampen a skeptical old journalist’s enthusiasm.
First, the good news. “Codified” signals an actual written law or regulations as opposed to the securities industry’s current “We already put clients’ interests first” claim. Not that some brokers don’t put clients first; but there’s a big difference between doing something if you feel like it and being required to do it by law. “Principles-based” is one of the key differences between an ‘advisor’ mentality and a ‘sales’ mentality. A principle is open ended, such as “Do unto others.” It’s up to us to figure out how. Conversely, a ‘rules-based’ approach creates a ‘safe harbor.’ “Just do X and Y, and your kiester is covered.” And finally, “rooted” in the current ’40 Act fiduciary standard: as opposed to letting the securities industry draw up its own ‘fiduciary’ standard.
With all that said, White’s remarks left plenty of room for skepticism. For starters, she said “rooted” in the current RIA standard. This is a far cry from simply applying the ’40 Act standard itself, or even the Dodd-Frank Section 913 mandate for a broker fiduciary standard that is “no less stringent” than the ’40 Act standard. The same way you might say a Prius is ‘rooted’ in the same concept as a Ferrari.
It gets worse. During the Q&A, Chairman White went on to say: “…the SEC should act under Section 913 of Dodd-Frank to implement a uniform fiduciary duty for broker-dealers and investment advisors, where the standard is to act in the best interest of clients when giving advice to retail investors.”
See the loophole?
When a client goes to an RIA, they get investment advice. Period. But even the Chairman of the SEC wants brokers to be, at best, part-time fiduciaries, only when giving advice. How are clients to know when that hat-switching occurs?
