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Uniform Fiduciary Standard Might Win Bipartisan Backing

By Rita Raagas De Ramos September 11, 2017

Members of a U.S. House of Representatives’ Financial Services Committee from both sides of the aisle seem to be pushing for a uniform fiduciary standard for all advisors. But the key questions – which remain unanswered – are how can this be achieved and how would this work?

When Finra CEO Robert Cook appeared before the House Subcommittee on Capital Markets, Securities and Investments last week the most common concerns raised by the legislators involved the Department of Labor’s fiduciary rule – which Republican and Democratic subcommittee members alike seemed to oppose, for various reasons – and the need to have a uniform fiduciary standard for all advisors.

Rep. Ann Wagner, R-Mo., who introduced a bill in July that seeks to replace the DOL rule with a best interest standard regulated by the SEC, said “a uniform standard is best, for all advisors" and that “the SEC is best suited to impose the fiduciary standard.”

Cook said he too is in favor of a uniform fiduciary standard and would welcome opportunities to work together with the SEC if the regulator pursues such a course.

“If the SEC moves forward, we would appreciate interacting with them and crafting some of the framework” for a uniform fiduciary standard, he said.

SEC chairman Jay Clayton has been collecting, since June 1, public comments from retail investors and other interested parties on standards of conduct for investment advisors and broker-dealers. This action has raised the hopes of opponents and detractors of the DOL rule. Clayton said in his June 1 statement that the inputs will “advance and inform the SEC’s assessment of possible future actions.”

At the time, Clayton said the range of potential actions suggested to the SEC has been broad. Recommendations included maintaining the existing regulatory structure, requiring enhanced disclosures intended to mitigate reported investor confusion, the development of a best-interest standard of conduct for broker-dealers, or pursuing a “single standard of conduct combined with a harmonization of other rules and regulations” applicable to both investment advisors and broker-dealers when providing advice to retail investors.

Rep. David Scott, D-Ga., said that he, like other legislators, has been urging the SEC to come up with a uniform fiduciary standard. He expressed to Cook his dismay that the SEC has yet to act. “Their failure to do so has put us in a difficult situation.”

Scott said the DOL rule is “complicated” and is “making it more difficult” for the financial advisory industry and investors.

To this, Cook replied that Finra would support a uniform fiduciary standard that is “helpful” and “understandable.”

Cook explained to Scott and the other subcommittee members that three best interest standards currently exist, including the DOL’s Erisa standard for qualified retirement accounts, broker-dealer standards that fall under Finra oversight, and the investment advisor standards arising from the Securities laws governing the SEC.

When asked by Scott how a uniform fiduciary standard could be achieved and how it would work, Cook replied: “There are opportunities now that didn’t exist before,” referring to the potential for collaboration among regulators and government agencies. But Cook stopped short of putting forward a solution.

“We would really be better off if we have a uniform fiduciary rule that applies to all investment advisors across the board and to all investors, and makes sense and accomplishes the stated goal,” says Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group. “The problem is we have an alphabet soup of regulators. You have the SEC, Finra, the CFTC, Board of Options Exchange, and so on and so forth.”

Added to the mix are fiduciary rules passed at the state level. Recently Nevada imposed, effective July 1, a fiduciary duty on broker-dealers, sales representatives and investment advisors who give investment advice.

Concilla says the first hurdle to implementing a uniform fiduciary standard is which regulator or agency should ultimately have the power and jurisdiction to implement and enforce such a rule.

Meantime, Concilla notes “most states, if not all, in the U.S.” already hold brokers to a fiduciary standard.

“There is a legal test to determine whether or not you’re a fiduciary: Are you in a position of authority over an individual?” he says. A broker with a relatively unsophisticated client is a fiduciary under this test because the client will rely on the broker’s advice, he says.

“Whenever that legal test is applied, the court finds that in that particular circumstance that a fiduciary duty had been created,” he says. “So, the notion that a broker could be a fiduciary is not novel at all.”

Meanwhile, Wagner’s bill, which is currently in the form of a Discussion Draft, seeks to amend the Securities Exchange Act of 1934 to “establish standards of conduct for brokers and dealers that are in the best interest of their retail customers.”

Under the proposed bill, when a broker-dealer or registered representative makes a recommendation to a retail customer, the recommendation should be in the retail customer’s best interest. This requires the advisor to reflect reasonable diligence and reflect reasonable care, skill, and prudence based on the customer’s investment profile.

The bill nonetheless lets an advisor charge commissions and take third-party payments, engage in principal transactions, sell proprietary products and offer a limited menu of products.

Tellingly, it also exempts the sale of annuities if those sales are governed by an advice standard that is “substantially similar” to the one contained in the bill. Variable annuities are securities regulated by the SEC, whereas fixed annuities are regulated by state insurance commissioners through the National Association of Insurance Commissioners.

The Consumer Federation of America opposes Wagner’s proposed bill for reasons that underscore the difficulty in coming up with a uniform fiduciary standard that could cover all advisors and all investors.

“While the draft bill purports to impose a best interest standard on broker-dealers’ investment recommendations, it would dramatically weaken existing protections for retirement savers without providing meaningful new protections for investors in non-retirement accounts, according to a letter dated July 11 and signed by the CFA's Barbara Roper, director of investor protection, and Micah Hauptman, financial services counsel.

The CFA says the bill denies regulators the ability to redress its many shortcomings. Under the bill, the SEC, the DOL and the Department of the Treasury would be precluded from adopting any requirements for broker recommendations that are in addition to the bill’s requirements. State authority would also be broadly preempted. “If these agencies wanted to adopt clarifying rules, shore up ineffective protections, or address unforeseen problems that may emerge in the future, they would be unable to do so,” the group says.

The CFA adds that the bill would increase investor confusion. “By scrupulously avoiding using the term fiduciary duty to describe its best interest standard, and by requiring no meaningful limits on conflicts, the bill strongly suggests that something less than a true fiduciary standard is intended to apply to brokers’ recommendations,” the consumer group says.

Further ahead of Wagner’s bill is the Financial CHOICE Act – a bill passed by the House of Representatives in July. It is best known for proposing to take back Dodd-Frank protections, including Wall Street regulations that arose from the financial crisis. It also proposes, among other things, the incorporation of the DOL rule into the Retail Investor Protection Act and requires the SEC to take “the driver’s seat” in fiduciary rulemaking. The Senate Banking Committee is expected to take up the Financial CHOICE Act in the coming weeks.