After years of positioning, the debate over establishing a single fiduciary standard for FINRA-licensed registered representatives and investment advisor representatives alike is finally coming down to practical terms that affect all financial advisors.
A March 28 letter to Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, signed by seven financial advisor and consumer associations — including the powerful AARP, which claims 40 million members — spells out in clear detail where the investment advisor and consumer groups that have joined together differ from the securities industry.
The group of seven includes:
Consumer Federation of America
Certified Financial Planner Board of Standards, Inc.
Financial Planning Association
Investment Adviser Association
National Association of Personal Financial Advisors
The group assails the securities industry position advocating that a new fiduciary standard be established that would apply to both those licensed to sell securities and investment advisors affiliated a Registered Investment Adviser.
The group of seven wants the fiduciary standard that currently applies under the Investment Advisers Act of 1940 to be applied to registered reps. In contrast, the securities brokerages advocate for a new fiduciary standard.
Currently, advisors who are registered reps affiliated with broker/dealers must meet a suitability standard, requiring what a rep sells to be suitable for a client. An investment adviser must meet a higher standard of care, always acting in a client’s best interest.
In constructing its opposition to the securities brokerages, the group of seven relied upon a letter sent to the SEC on July 14, 2011 by the Securities Industry and Financial Markets Association (SIFMA), the influential trade association for brokerages.
“Last year, SIFMA submitted a letter outlining its views on an appropriate framework for rulemaking in this area,” says the letter signed by the group of seven. “The SIFMA letter does a good job of highlighting the key issues the Commission will need to consider in developing a rule proposal. We agree with many of their points but disagree, sometimes strongly, with others.
“In order to make it as easy as possible for the Commission to determine both our points of agreement and where our views diverge,” adds the group of seven, “we have chosen to use their letter as a starting point for our own discussion of the same issues.”
Until now, the fiduciary debate was not discussed in such detail by either side in the battle. The points of contention brought up by the group of seven's letter to the SEC yesterday touch on practical business issues for advisors, including:
Below is a 1,102-word summary of the original 7,597-word letter to the SEC by the group of seven. The excerpts are numbered for easy reference in your comments.
You can also below read the full version with these excerpts highlighted.
- Some members of the broker-dealer community have expressed the concern that imposition of a fiduciary duty on brokers’ personalized investment advice could have catastrophic consequences – forcing brokers to abandon commission-based compensation, proprietary sales, or transaction-based recommendations. These concerns are clearly unfounded.
- While the Commission must be mindful of the impact upon the industry as it implements the fiduciary standard for brokers, it must also avoid an over response to expressions of broker-dealer concerns that reflect either a misunderstanding of the standard or an unwarranted effort to limit its scope.
- We strongly disagree with the suggestion that the substantive uniform standard articulated through those rules should be “new” or “separate and distinct from the general fiduciary duty implied under Section 206 of the Advisers Act.” Rather, the goal in writing the new rules should be to extend the existing Advisers Act standard to brokers, while clarifying its applicability in the context of broker-dealer conduct, rather than to replace the Advisers Act standard with something new and different.
- It is frankly disappointing that SIFMA continues to argue that there is some ambiguity about brokers’ ability to charge commissions or to sell proprietary products if they were subject to legal precedent and guidance regarding the Advisers Act fiduciary duty.
- SIFMA omits that portion of the standard which provides that the duty is to act in the best interests of the customer “without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” In other words, brokers and advisers subject to a fiduciary duty cannot satisfy that duty merely by disclosing their conflicts and obtaining customer consent to those conflicts, though that is certainly an important part of the fiduciary duty. They must not allow those conflicts to adversely affect their recommendations.
- We emphatically do not agree that a continuing duty would be exclusively a matter of written customer agreement....It does not follow, however, that brokers should only incur a continuing duty of care if that is included in a customer agreement. The continuing duty of care exists wherever there is on-going advice, or the implication of on-going account monitoring, regardless of whether that is provided for in a customer agreement. If the nature of the broker-dealer’s services contradicts their characterization in the agreement, then the actual services must dictate the nature of the legal duties that apply. In other words, the facts and circumstances of the relationship, and not the customer agreement, will determine the extent to which a continuing duty exists.
- The application of the standard must be interpreted broadly enough to include advice not to invest in securities where securities are among the options being considered. In other words, where securities represent an alternative to non-securities, then advice to invest in non-securities necessarily entails advice not to invest in securities, which constitutes advice about securities.
- A customer agreement cannot be used to limit fiduciary duties that would otherwise apply to the services offered.
- SIFMA argues that the uniform fiduciary standard of conduct should apply on an account-by-account basis. We agree, but only to a point…. If the Commission were to follow this account-by-account approach too rigidly, however, it might be possible for broker-dealers to evade the duty by segregating the advice and execution of recommendations into separate accounts. Any such attempt to game the system should be treated as a clear violation of the fiduciary duty.
- While the legislation makes clear that sale of proprietary products or sale from a limited menu of products should be deemed not to automatically violate the fiduciary standard, it does not follow that a recommendation from that limited menu of products should automatically be deemed to satisfy the best interest standard for each and every customer as long as the limitation is disclosed.
- As the Commission retains the ability to take action against conduct that is not in the best interest of investors, we support an approach that affirms that certain traditional brokerage practices and compensation arrangements do not in and of themselves constitute violations of the fiduciary duty.… we believe personalized investment advice should include advice on a decision not to purchase or sell securities.
- We agree that providing general research and strategy literature alone would generally not fall under a fiduciary duty, since it is by definition not personalized for the customer. On the other hand, personalized advice to a customer about or based on the literature would be subject to a fiduciary duty.
- We do not support a blanket exemption from the definition for all seminar content. Rather, whether seminar content would constitute investment advice would depend on the facts and circumstances. To the degree that the seminar constitutes communications to a targeted group of customers purporting to be based on their needs and designed to encourage them to purchase or sell a particular security, we believe it would fall within a definition of personalized investment advice. On the other hand, strictly educational content would not.
- We do not believe a determination of whether financial planning tools or calculators constitute advice should turn on whether they recommend specific securities. If they make any recommendations that would otherwise constitute personalized investment advice – such as a recommendation to allocate or reallocate funds in securities – then those recommendations should be covered by the fiduciary duty.
- We agree that most social media communications would generally not constitute personalized investment advice, but we are concerned that a blanket exemption for such communications could open the door to abuse. A recommendation to purchase or sell a particular security should not be exempt simply because it is delivered through social media. The substance and intent of the communication should determine the applicability of the standard.
- We generally agree with SIFMA’s discussion of the types of information that would need to be provided at account opening. Ideally, disclosures from brokers and advisers should be uniform in order to allow for easy comparison across firms. As such, the existing Form ADV would provide a reasonable starting point for discussion of the types of information that should be conveyed at the outset of a customer relationship. We believe information about disciplinary record must form an important component of pre-engagement disclosure. A simple referral to the BrokerCheck database would not suffice; direct disclosure is a must.
- While we continue to have significant differences with SIFMA regarding the details of such a regulatory framework, we share their belief that it is possible to develop a regulatory structure for the uniform fiduciary duty that ensures both that investors are protected and that they are able to access the financial services they want and need to achieve their investment goals.