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For SEC Fiduciary Rule, Regulate Titles First: CFA Institute Comments

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What’s the first logical step that the Securities and Exchange Commission should take in crafting a fiduciary rule? Regulate advisor and broker titles, advises the CFA Institute.

The Commission “can effectively begin to regain control of this [uniform fiduciary rule] issue by regulating the titles that those who provide personalized investment advice can use,” Paul Smith, president and CEO of the CFA Institute, which sponsors and oversees the Chartered Financial Analyst program and designation, told the agency in a June 13 comment letter.

Meanwhile, brokers in Nevada will now have to act as fiduciaries as of July 1 according to a newly revised law. Nevada Senate bill 383 revises the definition of financial planner “to remove the exclusions for a broker-dealer, a sales representative and an investment adviser, thereby making such persons subject to the provisions of existing law governing financial planners.”

CFA and other commenters are responding to SEC Chairman Jay Clayton’s June 1 request for comments on ways to help the agency craft possible changes to the Department of Labor’s fiduciary rule, as well as inform “possible future actions” by the agency on a fiduciary duty rulemaking of its own.

(Related: SEC Fiduciary Rule Cannot Replace DOL’s: Financial Planning Coalition)

CFA Institute is “acutely aware of the difficulty the Commission faces in attempting to draft a uniform standard for everyone providing such [fiduciary] advice, as it would likely involve numerous exemptions and carve-outs for different types of clients, transactions and situations,” Smith wrote.

Like the Commission’s Investor Advisory Committee, CFA institute recommends that the SEC require that “anyone wishing to refer to their title and/or activities as advisory in nature (e.g. ‘adviser’ or ‘advisor’) adhere to the Investment Advisers Act and the fiduciary duty implied by common law interpretation of the Act,” Smith said.

Such control of terminology “would not be new to the Advisers Act, which already expressly limits use of the term ‘investment counsel’ to those who must adhere to the Advisers Act’s requirements,” he wrote.

However, at the same time, CFA Institute believes “commission-based sales activities serve important client needs and give investors options for how they wish to conduct their investment activities.”

Whether commissioned brokers provide investment ideas or execute trades, CFA Institute supports brokers being allowed “to pursue their business activities, so long as they are clear about their roles vis-à-vis their clients.”

Specifically, CFA said that the SEC should require that they refer to their roles with the title, “salespersons.”

Said Smith: “For too long, these sales staff have blurred the line between what they do – selling investment ideas to generate commission-based transactions – and what investment advisers do – advising clients on investment strategies and tactics to achieve their financial goals.”

Once the issue of titles is addressed, “the SEC will have a clearer idea of what kind of rules are needed to address other aspects of the standards-of-care issue,” he added.

David Madsen, a certified financial planner with Merrill Lynch, stated in his comment letter that the SEC’s “regulatory staff is the agency equipped to implement and monitor a fiduciary standard rather than the cobbled together version from DOL (without adequate enforcement staff…so the world of ambulance-chaser attorneys becomes the enforcement mechanism for DOL by default as written).”

As to protecting the “little guy,” under Labor’s rule they are being labeled “as not profitable enough vs. the liability risk. So they are being told to ‘fire up your personal computer and get your advice from a robo-advisor,’” Madsen wrote. “Human financial advice is now a luxury that Washington is mandating only for the ‘rich.’”

Geoffrey E. Wilwerding, senior vice president of Wealth Management and senior portfolio manager with UBS Financial Services Inc. in Seattle, told the SEC in his comment letter that “if you pass a standard like what is proposed [by DOL] it completely hammers the little investor. Trust me, you will end up being hated more by small retail investors when all they are trying to do is invest their funds and grow their assets.”

Added Wilweding: “There are soooooooo many rules and regulations in place as it is right now that any idiot broker who tries to churn a small account gets stopped in his or her tracks almost immediately at the firm level; so why blanket a rule that hits they investor so hard? They are already protected. I don’t have a problem with the fiduciary piece of it. The pricing piece will not make sense.”

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