Uni­form Fidu­ciary Stan­dards Mov­ing For­ward

The Suit - - News -

Agreat de­bate over fidu­ciary stan­dards (the le­gal duty to act solely in another party’s best in­ter­est) – and their im­pact on con­sumers, bro­ker-deal­ers and in­vest­ment ad­vis­ers – has been rag­ing ever since the con­fi­dence-shat­ter­ing 2008 fi­nan­cial melt­down. In the sum­mer of 2013, the Se­cu­ri­ties and Ex­change Com­mis­sion fielded sug­ges­tions and com­ments from in­dus­try pro­fes­sion­als re­gard­ing the pos­si­bil­ity of ini­ti­at­ing a uni­form fidu­ciary stan­dard. Wall Street’s reg­u­la­tory board was prompted by nu­mer­ous stud­ies re­veal­ing the fact that a great many re­tail in­vestors are con­fused by the dif­fer­ent roles played by in­vest­ment ad­vis­ers and bro­kers. Ad­di­tion­ally, calls from myr­iad con­sumer groups for this type of uni­form stan­dard con­tinue to rise.

Both the SEC and the Fi­nan­cial Mar­kets As­so­ci­a­tion, the main lob­by­ing group for Wall Street firms, op­pose such a rec­om­men­da­tion, cit­ing le­gal head­winds. Such a move aims to ap­ply to bro­kers laws writ­ten for in­vest­ment ad­vis­ers.

The or­ga­ni­za­tions’ en­dorse­ment is for bro­kers – who give cus­tomers rec­om­men­da­tions to buy, sell or hold a se­cu­rity but don’t pro­vide ad­vice – not to be held to a fidu­ciary duty. Bro­kers would only have to com­ply with the less strin­gent stan­dard of in­vest­ment suit­abil­ity. Mean­while, those who hold them­selves out as in­vest­ment ad­vis­ers, “based ei­ther on the ti­tles they use or the man­ner in which they mar­ket their ser­vices” should have a fidu­ciary duty.


The big push for a uni­form stan­dard is mainly com­ing from in­vest­ment ad­vis­ers, who pride them­selves on act­ing out of duty and loy­alty. They claim that, dur­ing the process of ex­e­cut­ing or­ders for cus­tomers, bro­kers can ac­tu­ally wind up pro­vid­ing ad­vice, and thus should be held to the same strict stan­dards that they them­selves follow. In­de­pen­dent ad­vis­ers have long wor­ried that their so-called fidu­ciary stan­dards could be di­min­ished or di­luted by the ac­tions of bro­kers. Bro­kers fear they won’t be able to sell mu­tual funds with­out fall­ing un­der tougher stan­dards, even when deal­ing with cus­tomers who merely want to ex­e­cute an in­vest­ment trans­ac­tion and are not look­ing for in­vest­ment ad­vice.

The pri­mary goal, re­gard­less of the out­come, is to pre­vent abu­sive sales prac­tices.

Just be­fore Thanks­giv­ing, the In­vest­ment Ad­vi­sory Com­mit­tee, which is ad­vis­ing the SEC on the reg­u­la­tion of se­cu­ri­ties prod­ucts, unan­i­mously voted to rec­om­mend that the SEC set a uni­form fidu­ciary stan­dard for most bro­kers and regis­tered in­vest­ment ad­vis­ers for act­ing in the best in­ter­est of their clients when­ever they give fi­nan­cial ad­vice. While the vote doesn’t mean that the SEC will adopt the IAC’s rec­om­men­da­tion, it is a big step in that di­rec­tion. With Wall Street’s rep­u­ta­tion sorely sul­lied from the fi­nan­cial cri­sis, the Bernie Mad­off Ponzi scheme and the Allen Stan­ford scan­dal, a uni­form fidu­ciary stan­dard would def­i­nitely add some sorely needed im­prove­ment to the in­dus­try’s im­age.

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