Uniform Fiduciary Standards Moving Forward
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 SUIT MAGAZINE - DEC / JAN 2014
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.