Views on improving the integrity of global capital markets
24 January 2011

A Higher Duty: SEC Concludes Study of Fiduciary Obligations

Posted In: Fiduciary Duty, US SEC

After months of anticipation, staff of the U.S. Securities and Exchange Commission (SEC) released their long-awaited study of the obligations of those who provide investment advice to retail investors, as mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act. You’ll recall that the controversial issue of requiring a single fiduciary duty for all professionals who provide personalized investment advice was one of the most-watched features of the U.S. financial reform debate — culminating with Congress kicking the can down the road by requiring SEC staff to “study” the issue.

Unsurprisingly, SEC staff recommend a “uniform fiduciary standard” focusing on the duties of loyalty and care. So, under this standard, financial professionals offering investment advice to individuals couldn’t put their own interests ahead of clients (loyalty), and they’d have to be reasonably sure that their recommendations weren’t based on inaccurate or incomplete information (care). But the staff believe that this uniform standard can be agnostic when it comes to the business model used by the adviser: commission income is still fine, offering proprietary products exclusively is OK, the more onerous principal trade provisions of the Investment Advisers Act wouldn’t have to apply to brokers, and brokers wouldn’t have to offer a continuing duty of care or loyalty over the course of the client relationship. Maintaining these staples of the broker business model would be accommodated through disclosure. But there’s the rub: customers would probably have a pretty good idea already of the potential for conflicts of interest with their advisers if they plowed through the existing disclosures — often buried in boilerplate or legalese. The SEC staff acknowledges this to some extent, emphasizing the need for clear, simple disclosure at the onset of client relationships. Easier said than done.

Two SEC commissioners (Kathleen Casey and Troy Paredes) objected to the release of the study, arguing that while existing investor confusion might be beyond dispute, the practical consequences of that confusion have not been studied or established. They propose a number of additional studies, some of which are rather ambitious in design (comparing security selection and investment returns from investment advisers and brokers, for example.) We are unconvinced that any potential benefits of such studies would be worth the costs to investors in terms of further delays in raising the standard of care required of those who offer advice.

So far, reaction from the investment management industry seems cautiously supportive. Given the prominence of the CFA Institute Code of Ethics and Standards of Professional Conduct, in which the duties of prudence, loyalty, and care are demanded of each of our members, our bias on this issue is pretty clear. We appreciate that there is more than one way to structure investment advice but also firmly believe that investors are best served when those who offer investment counsel adhere to a high standard of care. We think the SEC staff study reflects a promising start to fulfilling that objective.

About the Author(s)
Bob Dannhauser, CFA

Bob Dannhauser, CFA, is head of global private wealth management at CFA Institute.

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