SEC Study on Fiduciary Standard Sets Up Fight

January 28, 2011

By Linda Koco
Contributing Editor

Jan. 28, 2011 -- A Securities and Exchange Commission (SEC) staff study published last week about fiduciary standards is already setting off a new round of skirmishing over advisor standards of care.

Two SEC commissioners objected to the study as soon as it came out, and early reactions from financial industry representatives reveal sharply divergent positions.

Adding to the tension is the fact that the SEC does have the authority to go ahead and promulgate new standard of care rules.

The long-awaited study calls for adoption of a uniform fiduciary standard of care for broker-dealers (B/Ds) and investment advisers. 

The fiduciary standard requires advisors to put the customer’s interests first when providing investment advice. Investment advisors are already subject to this standard. B/Ds are currently held to another standard—a suitability standard requiring them to provide advice and products most suited to the customer.

Required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010, the study not only recommends extending the fiduciary standard to include B/Ds. It also recommends “harmonization” of B/D and investment adviser regulatory regimes, to enhance their effectiveness in the retail marketplace.

Two SEC commissioners--Kathleen L. Casey and Troy A. Paredes—have entered strong objections to the report in a statement published on the SEC website. In fact, they flat out say that they “oppose” the study's release to Congress as drafted.

“We do not believe the Study fulfills the statutory mandate of Section 913 of the Dodd-Frank Act to evaluate the ‘effectiveness of existing legal or regulatory standards of care’ applicable to broker-dealers and investment advisers,” they write.

The National Association of Insurance and Financial Advisors (NAIFA), Fairfax, Va., has also voiced concern about the staff recommendation for a uniform fiduciary standard.

If carried out, the recommendation has the potential of increasing B/D costs and liability, says NAIFA President Terry Headley in a statement. That could result in mid- and lower-market investors “having less access to the account services and investment advice” currently delivered by B/Ds’ registered representatives, Headley says. NAIFA published a survey on these concerns in December .

But the Financial Planning Coalition has the SEC staff’s back. The coalition is applauding the staff recommendations, and it is urging the SEC to act quickly and initiate a rulemaking process for a uniform fiduciary standard of care. Coalition members say they are ready to work with the SEC to implement rules consistent with Dodd-Frank goals.

“Investors expect and deserve advice that is in their best interests, regardless of who is providing the service,” says Susan John in a statement from the coalition. John is chair of the National Association of Personal Financial Advisors (NAPFA), one of the coalition members. Other coalition members are the Certified Financial Planner Board of Standards (CFP Board), and the Financial Planning Association (FPA).

Study recommendations

Several recommendations in the study are designed to address investor confusion, the staff writes.

They are also designed to provide for “a stronger and more consistent regulatory regime for B/Ds and investment advisers providing personalized investment advice about securities to retail investors,” the staff adds.

The staff points out that new uniform standard of care rules would require “all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers, to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

That would not conflict with commission-based business models, however. As the staff puts it, Section 913 of Dodd-Frank “explicitly provides that the receipt of commission-based compensation, or other standard compensation, for the sale of securities does not, in and of itself, violate the uniform fiduciary standard of conduct applied to a broker-dealer.”

Here are some other points the staff makes in the study:

• A uniform standard of conduct will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest.

• The Commission should consider specifying uniform standards for the duty of care owed to retail investors. At a minimum this could include specifying what basis a B/D or investment adviser should have in making a recommendation to an investor.

• The Commission should engage in rulemaking and/or guidance about what it means to provide “personalized investment advice about securities.”

• The Commission should consider additional investor education outreach as an important complement to the uniform fiduciary standard.

• The Commission should consider articulating consistent substantive advertising and customer communication rules and/or guidance for B/Ds and investment advisers.

• The Commission should review supervisory requirements for investment advisers and broker-dealers, with a focus on whether any harmonization would facilitate the examination and oversight of these entities

• The Commission could consider requiring investment adviser representatives to be subject to federal continuing education and licensing requirements.

More comments

Here are a few more points made by objecting Commissioners Casey and Paredes:

-          “In our view, the Study's pervasive shortcoming is that it fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors.

-          “The Study recommends the adoption of a new uniform fiduciary duty standard and harmonization of two disparate regulatory regimes. But it does so without adequate articulation or substantiation of the problems that would purportedly be addressed via that regulation.

-          “The Study also does not adequately recognize the risk that its recommendations could adversely impact investors.

-          “Indeed, the Study does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the Study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection.”

Here are additional comments from NAIFA President Headley:

-          “NAIFA agrees with Commissioners Casey and Paredes that the study fails to adequately justify or support the recommendation that the SEC propose the adoption of a ‘new uniform fiduciary duty standard and harmonization of two disparate regulatory regimes.’

-          “NAIFA has previously expressed concerns, similar to those raised by Commissioners Casey and Paredes, that the SEC study does not ‘adequately recognize the risk that its recommendations could adversely impact investors.’”

-          NAIFA shares the commissioners' concerns that the study does not account appropriately for cost and discounts nor for the risk that there may be fewer B/Ds and investment advisers, fewer choices in product and services, and higher costs for the services and advice that consumers do receive.

Here are some additional comments from the Financial Planning Coalition:

-          “Extending the fiduciary standard to B/Ds will reassure consumers that the advice they seek–whether it’s from a B/D or investment adviser–will be provided at the same high standard that puts their interests first.” (Marty Kurtz, 2011 president of the Financial Planning Association and a coalition member)

-          “The extension of a fiduciary standard of care to all B/Ds will build much-needed confidence among the average American consumer whose faith in the financial markets is still shaken.” (Charles A. Moran, 2011 Chair of the Board of Directors of the Certified Financial Planner Board of Standards, Inc. and a coalition member)

-          A review of broker and adviser rules can also help minimize investor confusion by trying to standardize regulations that apply to like services.

The Commission itself has expressed no view regarding the analysis, findings, or conclusions of the study. The 208-page document is the work of a cross-divisional staff task force called “the Staff.” The study goes not only to Congress but also to the full Commission for potential use rulemaking, guidance and other activities.

See related story: Fiduciary Standards with Teeth Can Bite Agents

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

© Entire contents copyright 2011 by Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from


Comment on this article




Featured Offers