Regulators, consumer advocates and politicians continue to hammer out what it might mean for Series 65 investment advisors and series 7 registered reps to adhere to the fiduciary standard, under the Obama administration's June plan for financial services regulatory overhaul. One of the biggest sticking points is, which fiduciary standard?
The Investor Protection Act of 2009, released by the Treasury Department on July 10, is the second draft of legislation that would implement some of the financial reforms outlined by the Obama administration in a June white paper. Among other things, the Act would authorize the Securities and Exchange Commission (SEC) to “harmonize” the regulation of investment advisers and broker-dealers and establish a fiduciary standard for both. In the language of the Act, it would require both types of financial advisors “to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice, when providing investment advice to retail customers or clients (or such other customers or clients as the SEC may determine).”
Currently, Series 65 investment adviser reps, who are regulated under the Investment Advisers Act of 1940, must adhere to the fiduciary standard, which requires that they put the interests of their clients before their own when selecting investments for those clients. But the Securities Industry and Financial Markets Association (SIFMA), would like any legislation to create a new standard called the “federal fiduciary” standard, according to a July 17 release.
"It won't matter who is giving the advice—broker or advisor—investors will be protected by the exact same federal fiduciary standard when receiving the same services,” says SIFMA President and CEO Timothy Ryan. Today, as is well known, series 7 registered reps, who are regulated under the Securities Exchange Act of 1934, are only required to select investments for their clients that are “suitable,” which gives them greater flexibility when it comes to price and other factors. Critics contend that creating a new fiduciary standard would likely mean watering it down.
SIFMA has also said publicly that the fiduciary standard should not apply to all of a financial advisor’s business activities; exceptions should be made, as there are times when broker-dealers offer services that Series 65 investment advisors do not, such as raising capital for business or brokering mergers and acquisition deals. When broker-dealers operate in such business areas, and when personalized advice is not involved, the suitability standard should apply instead, they say.
“I think the real question is are those people talking about ‘the’ fiduciary duty under the advisors act, or are they talking about something different and in SIFMA’s case it is very clear to me they are talking about something different, a new federal standard,” says David Tittsworth, executive director of the Investment Adviser Association (IAA). The IAA, together with the Certified Financial Planner Board of Standards (CFP Board), the Consumer Federation of America (CFA), the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the North American Securities Administrators Association (NASAA), fear the proposed language in the current act may fall short, if it does not extend the fiduciary duty of investment advisors to brokers. Tittsworth says the Act shouldn’t water down the current standard of fiduciary duty, a well established legal standard under the Investment Advisors Act of 1940.
“Fiduciary is just a word right now—this is a standard everyone should be held to and we accomplished something because we used this word,” says Eric Schwartz, founder of Fairfield Iowa independent b/d Cambridge Investment Research. However Schwartz says the industry has a long way to go towards explaining what it means. “It is a very murky area and my belief is that when they actually spell this out, regulations will have to be written for years to come after to determine what exactly it means in every case to be a fiduciary.”
Among other measures, The Investor Protection Act of 2009 would also empower the SEC to require that firms disclose to the nature of their relationship to clients, and to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest. Some critics say, however, that this is not enough, because it doesn’t specify specific kinds of compensation practices.
