Views on improving the integrity of global capital markets
10 September 2013

SEC Fiduciary Rule: Putting the Focus back on Investors

Not surprisingly, input from the investment industry on whether the SEC should raise investment advice standards for brokers is mixed. Brokers, bankers, and insurers currently held to a “suitability standard’’ — and whose commission-based funding models can create conflicts of interest — find themselves on one side of the spectrum. At the opposite end: registered investment advisers already held to a more stringent “fiduciary standard.”

As reported by the Wall Street Journal, “brokerages and others in their camp see allowing conflicts of interest — but with proper disclosure to the client — as a key part of the new rules.”

Meanwhile, the Securities Industry and Financial Markets Association (SIFMA) has expressed concern about the cost of implementing new rules: “The cost of simply preparing a guide for use with any revised set of standards and maintaining it for the first year is likely to be $1.2 million to $4.6 million, according to a group of Sifma member firms,” the article states.

Now the industry eagerly awaits a decision from the SEC, if it opts to institute a uniform standard at all. If it does choose to proceed, will the Commission level the playing field but do so without diluting the stringent standard that currently applies to investment advisers?

A Fiduciary Standard for All

The reality is that most investors don’t understand the difference between fiduciary and suitability standards. That’s according to a 2008 study commissioned by the SEC (the “RAND Study”), which found that the majority of typical retail investors were confused over the titles and duties of their financial services providers.

On top of investor confusion, bad investments are often sold because of the high sales commissions they generate. Indeed, the 2013 CFA Institute Global Market Sentiment Survey — which polled CFA Institute members on their outlook for world capital markets in the coming year — revealed significant concern among CFA Institute members with the mis-selling of investment products.

In a 3 July comment letter to the Securities and Exchange Commission, CFA Institute reiterated its concern about the different standards of care currently required of broker-dealers and investment advisers when providing the same services to clients.

CFA Institute also maintains that the range of services offered by broker-dealers has evolved over time and the lines between “advice giving” by advisers and broker-dealers have become blurred. We do not believe the original intent of Congress in establishing two separate statutory frameworks/standards of care for advisers and broker-dealers envisioned this overlap. Thus, the SEC should restore the original intent through regulations that clarify that the fiduciary duty standard applies when providing personalized investment advice — particularly to retail investors — regardless of whether the provider is a registered investment adviser, a broker-dealer, or another type of investment professional.

Although the U.S. Dodd-Frank Act gave the SEC authority to create a regulation that would impose a uniform fiduciary standard of care for retail investment advice — and a January 2011 SEC report recommended that the agency proceed with a rule — the agency is not required to take any action at all. According to Investment News, recently installed SEC Chairman Mary Jo White has said the agency is focused on completing a fiduciary duty rule proposal as quickly as possible; however, it is just one piece of an ambitious rule-making agenda mandated by the Dodd-Frank and JOBS Acts.


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Photo credit: AP Images

About the Author(s)
Crystal Detamore

Crystal Detamore is a communications director at CFA Institute and a former columnist for Entrepreneur magazine.

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