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SEC’s fiduciary duty clock to run out

By Sheyna Steiner ·
Wednesday, January 5, 2011
Posted: 8 am ET

Last year the Dodd-Frank Wall Street Reform and Consumer Protection Act passed into law. Among the many other financial issues it dealt with, the act empowered the SEC to study the need for fiduciary standards for broker-dealers and then pass a rule imposing the standard.

Congress gave the SEC six months to look at the issue. And, the clock runs out this month.  

Under the current system, registered investment advisors are held to fiduciary standards. Brokers must adhere to suitability standards which require that investment products be in line with a client's finances, investing experience and objectives.

As the SEC pondered fiduciary duty, consumer advocates and the investing industry argued on the sidelines.

Imposing fiduciary standards on brokers would necessitate clear disclosures of conflicts of interest. If a broker gets paid more for recommending a particular product, that would be revealed.

But that's not all; the fiduciary standard requires that investment advisors put the client's best interests first.

Back in July when the SEC took up the study, the inevitability of the higher standard seemed like a slam dunk but that may not be the case.

On Jan. 3, the AdvisorOne website conjectured that the SEC may impose a different set of regulations for brokers. In the story "SEC may impose disclosure-only reg, not fiduciary duty, for brokers," Melanie Waddell reported that one advocacy group in favor of fiduciary duty believes brokers may be handed a disclosure-based standard.

The story quotes Knut Rostad, chairman of the Committee for the Fiduciary Standard.

"Disclosure of conflicts, as opposed to avoidance or mitigation of conflicts, has become the central battlefield over whether the fiduciary standard survives," he said. "The securities industry is pressing very hard for a casual disclosure-based standard that would, effectively, remove fiduciary duties when material conflicts are present."

Stay tuned to see how it plays out. A real universal fiduciary standard would be a big win for consumers.

According to the story, the SEC will send the results of the study to the House and Senate on Jan. 21.

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