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Fiduciary standard 1 year later

By Sheyna Steiner ·
Thursday, July 28, 2011
Posted: 9 am ET

A year after the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, the Securities and Exchange Commission has plowed through many of the studies that the act required and has proposed or adopted rules for the 90 provisions requiring them, the SEC website reports.

One of those provisions empowered the SEC to boost investor protections by requiring all financial service professionals giving advice to consumers to adhere to a fiduciary standard.

Last week Mary Schapiro, SEC chairman, announced that a rule setting a universal fiduciary standard would possibly be ready in the fall.

It remains to be seen how that new higher standard will look however, says Duane Thompson, senior policy analyst at fi360, a service providing training on fiduciary standards. He's also the president of Potomac Strategies, a legislative and media relations firm in Washington, D.C.

"When you look at the study given to Congress in January, the SEC staff emphasized a robust fiduciary standard. When regulators look at fiduciary duty, they look at loyalty, how does the adviser manage conflicts of interest?" he says.

The report summarizing the six-month study on the need for a universal fiduciary standard also emphasized duty of care, which means taking reasonable care to not do things that could foreseeably harm their clients.

As is so often the case, deep-pocketed investment trade associations have fought regulations mandating a higher standard of care every step of the way.

SIFMA, for instance, the securities industry and financial markets association, sent a letter to the SEC outlining what they would like to see in the new standard.

"Its ideas really erode and dilute the Investment Advisers act of 1940," says Thompson.

But we may get some clues as to how the final rule may shake it by looking at the standard established by the Investment Advisers Act of 1940 and what SIFMA finds amenable.

"They sometimes try to meet in the middle," he says.

The standard in the 1940 act has already been watered down by Dodd-Frank itself.

"Already clear restrictions that were put in that allows hat changing, if you are dually-registered broker and investment adviser and acting as investment adviser with fiduciary duty to the client, you can change hats and go to a lower standard," Thompson says.

The lower standard would most likely be the suitability standard that requires investments to be appropriate for the client's objectives and time frame.

Here's an excerpt from the SIFMA letter. It can be found here.

The contents of the Investment Advisers Act of 1940 can be found here.

We advocate for taking the sum and substance of the general fiduciary duty implied under the Advisers Act and articulating it through SEC rulemaking as the uniform fiduciary standard of conduct – a standard which would:

  • apply only to, and be tailored for, those services and activities involving provision of personalized investment advice about securities to retail customers;
  • provide for reasonable approaches to managing conflicts;
  • provide adequate flexibility to preserve and enhance client choice, product and service innovation, and capital formation; and
  • otherwise provide the detail and guidance necessary to enable broker-dealers and investment advisers to apply the standard of conduct to their distinct operational models.

However it shakes out, at least consumers will have added protections -- that they already assume are there, by the way -- and there will be more transparency when it comes to fees.

Is it just me or does it seem universally ill-advised to let industries set the regulations they're willing to endure. Mr. Fox, this is the henhouse you'll be guarding -- good luck!

We'll see what happens.

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