As the Securities and Exchange Commission mulls a fiduciary standard rule of its own, should the agency also tackle regulating advisor and broker titles?
Industry officials and a former SEC commissioner recently debated the merits of the securities regulator taking on such a task, with Jim Allen, head of capital markets policy at CFA Institute, arguing that the agency should require those who call themselves “advisors,” be it with an “o” or an “e,” or “who are providing personalized investment advice as something more than just an incidental part of their businesses,” to register as investment advisors, thereby binding them to fiduciary regulations established under the Investment Advisers Act.
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While not a particularly new idea, such a regulatory reining in of titles is gaining renewed debate as the SEC re-energizes its fiduciary focus.
Common law interpretations of the act “include an imputation of a fiduciary duty of care for registered investment advisors,” Allen said during a webcast held on Sept. 6.
“If everyone who is either engaged in or holding themselves out as advisors has to register under the Advisers Act, there is no need” for what the SEC’s Investor Advisory Committee has called “a parallel body of law — i.e., a separate SEC-created fiduciary duty rule,” Allen argued on the webcast, which was sponsored by TD Ameritrade Institutional.
Those not registered as an advisor would operate under “the lower suitability standard of care, yes,” Allen continued, “but they wouldn’t be able to provide investment advice as a routine, primary part of their jobs. Nor would they be able to tell investors that they are advisors. Rather, they would have to let them know of their sales roles, thereby giving investors a fighting chance of grasping the difference” between an advisor and a broker.
Former SEC Commissioner Luis Aguilar agreed during the webcast that many broker-dealers “market themselves as financial advisors, which exacerbates investor confusion.”
As multiple studies have shown, “most individuals cannot distinguish one type of advisor from the other,” Aguilar continued. “Beyond the confusion, brokers who provide personalized investment advice are being allowed to end run the Advisers Act and its higher fiduciary standard, and are not required to disclose the same level of information and many of the conflicts that they have.”
A staunch advocate of the agency moving forward on a fiduciary rule during his time at the commission, Aguilar stated that the SEC should “move away from a two-tiered market, which [has] different client obligations, and move toward a uniform fiduciary standard of care for all those who provide investment advice no matter what title is on their individual business card.”
The SEC “has always had the authority to act by rulemaking [on a fiduciary standard], and it should act,” Aguilar said. “Why it’s taken so long is an embarrassment.”
Sorting Through the Titles
As Brian Hamburger, CEO of regulatory consulting firm MarketCounsel, noted on the recent webcast, in 1999 — under what is commonly referred to as the broker-dealer exemption — the SEC said that brokers’ fee-based advice “did not have to include a fiduciary responsibility as long as the broker wasn’t making the final investment decision,” sparking a proliferation in the early 2000s of fee-based brokerage accounts.
Brokerage firms then started to “dress up” as independent advisors and started to “rebrand” the broker role — with firms applying different titles to registered reps like financial consultant, financial representative and wealth manager — with the message from the firms being: “‘Whatever you do, don’t call them brokers.’”
Aguilar, who’s now a partner at Falcon Cyber Investments LLC, added that while he supports “clarity” on the use of titles, “I focus more on what they [advisors/brokers] do — not necessarily on their title.”
The SEC, in any potential rulemaking, “will have to be creative in trying to address what titles are appropriate” in complying with a fiduciary standard.
What About the Fiduciary Rule?
But will the SEC finally take action on its own fiduciary rulemaking? Aguilar opined that it really depends on whether the Department of Labor’s fiduciary rule “stays its course.” The SEC “will have more of an impetus to take action because of the duality” of advisors and brokers covered under DOL’s rule under ERISA and the SEC’s rule under securities laws, he said.