Views on the integrity of global capital markets
25 February 2015

Labor Department’s Pending Fiduciary Proposal Signals Tighter Broker Rules Ahead

Posted In: Fiduciary Duty, US SEC
Global Pension Crisis

The Obama Administration has announced its support for tougher rules for brokers and other retirement account advisers, requiring them to put their clients’ best interests ahead of personal gain.

The Labor Department’s long-delayed proposal, slated for rollout over the next few months, is the latest development in a long and winding path to raising investment advice standards. Although the US Dodd-Frank Act gave the Securities and Exchange Commission authority to create a regulation that would impose a uniform fiduciary duty for retail investment advice — and a January 2011 SEC report recommended that the agency proceed with a rule — the agency has failed to take action for more than two years. When the SEC returned to the regulatory proposal in March 2012 — and asked for industry and public input on the cost and benefits of imposing a fiduciary rule — it didn’t take long for tensions to flare along predictable lines.

Brokers, who are 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 who have long been held to a more stringent “fiduciary standard.”

The Department of Labor, meanwhile, is working on a separate fiduciary rule proposal aimed at those who offer retirement investing advice.

According to White House-released materials, under outdated rules on providing investment advice to retirement savers, investors cannot count on receiving the unbiased advice that they need and expect. In other words, today’s rules allow advisers to put their bottom line ahead of their clients’ retirement security. “A system where middle-class families shoulder 100% of the risk for their investments, but brokers receive incentives for directing them into investments that aren’t in their best interest isn’t fair,” stated a While House-released fact sheet.

As the public awaits further details on the specific language of the DOL fiduciary duty rule proposal, the SEC continues to note its consideration of whether to propose a fiduciary duty rule for all those — including brokers — who provide personalized investment advice to retail investors. 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.

CFA Institute Code and Standards requires members to place the interests of clients above their own personal interests. This recognizes, among other things, adherence to the duties of loyalty, prudence and care. In addition, in our comments to the SEC, we have reiterated our concern about the different standards of care currently required of broker-dealers and investment advisers when providing the same services to clients.

We also maintained 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.

On top of investor confusion, there is concern about misalignment of interests. Indeed, the recently released 2015 CFA Institute Global Market Sentiment Survey reveals that CFA Institute members, who are held to a code of high ethical standards, believe that misaligned incentives of investment management services and mis-selling of financial products are the most serious ethical issues facing the US market in 2015.

While the SEC’s rule remains on hold, we look forward to offering public comment on the Labor Department’s proposal and its efforts to put investors’ interests first.


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Image credit: iStockphoto.com/Marchcattle

About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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