Sat, January 22, 2011
SEC Study Recommends Fiduciary Standard for Broker-Dealers
Investment advisers have long been required to act as fiduciaries, placing the best interests of their clients above their own. In a significant report released today, the staff of the SEC has issued a recommendation that a “uniform fiduciary standard of conduct for broker-dealers and investment advisers -- no less stringent than currently applied to investment advisers under the Advisers Act – [be applied whenever] those financial professionals provide personalized investment advice about securities to retail investors.” This would be a major change from current regulatory policy.
One of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year was a directive for the SEC to examine whether a uniform fiduciary standard should be adopted for broker-dealers and investment advisers. Brokers are currently held to a standard that only requires that they recommend products that are “suitable” to their clients, without regard to whether the choice of the product would be in a client’s best interest. The report is the SEC’s response to the Dodd-Frank requirement that a policy change be considered.
There’s still a long way to go before any regulations are actually changed, and it will be interesting to see how the SEC will address implementation. It would seem difficult for a broker to abide by a true fiduciary standard, since a broker’s job is to sell products, while a fiduciary is obliged to tell a client when a product might not be the client’s best choice. If a broker’s firm does not sell a product that would be in a client’s best interest, will he or she be obliged under new rules to tell the client to buy someone else’s investment product? The financial industry would likely oppose the creation of such a situation, but it remains to be seen how the details will be worked out.
In an unusual dissenting opinion, two SEC commissioners have questioned whether the analysis done in the staff report was sufficient to prove that a uniform fiduciary standard is in the best interest of investors. They wrote, “Regulation based on poorly-supported recommendations runs the risk of restricting retail investors’ access to affordable personalized investment advice and the range of products and services they currently enjoy.” Among other things, they question whether the application of a fiduciary broker-dealer standard will result in higher costs for consumers. In order to meet their objections, more data would need to be gathered before implementing any changes.
Whether these objections gain any traction or not, the SEC staff report is just the first step towards any possible change of regulatory policy. The next step would require defining just how a uniform standard is to be applied, and there is a great deal of speculation about the final outcome. Some fear that the implementation will be a “watered-down” definition of fiduciary responsibility, so we’ll have to wait and see what happens.
