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Why Many Think a Uniform Fiduciary Rule Won’t Work

By Rita Raagas De Ramos October 23, 2017

Some legislators and regulators argue a uniform fiduciary standard is the best approach to investor protection because it would be the most easily understood solution. Others disagree because of the challenges of coming up with an all-encompassing, uniform fiduciary standard. Yet others object because they believe the compromises required to reach uniformity would result in a weak and ultimately ineffective fiduciary standard.

When Finra CEO Robert Cook appeared before the House Subcommittee on Capital Markets, Securities and Investments last month, legislators from both sides of the aisle were keen on pushing for a uniform fiduciary standard for all advisors.

Cook was enthusiastic about the suggestion and vowed Finra would work with other agencies to help achieve it. “We support a uniform standard as well. We think that will be the most helpful and frankly, understandable by all of the investors.”

SEC chairman Jay Clayton is currently collecting comments on standards of conduct for investment advisors and broker-dealers, noting one recommendation put forward to the regulator is 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.

Not so fast, say others outspoken in the fiduciary standard debate.

Top among them is Barbara Roper, director of investor protection at the Consumer Federation of America. She believes with all the strong lobbying she’s seen against the Department of Labor’s fiduciary rule, wishing for a uniform fiduciary standard that would truly protect the best interests of investors is futile.

Lobbying groups such as Sifma and the Investment Company Institute “don’t want a uniform fiduciary standard” she says. “They want a uniformly weak and watered-down standard.”

The proposal submitted by Sifma to the SEC is “designed to take the existing suitability standard, rebrand it as a best-interest standard, add a few disclosures that no investor will read and understand, and pretend that they’ve done something to improve protections for investors,” Roper says. “That is not acceptable. That is not a compromise.”

She adds that “the Sifma proposal, echoed by ICI, would undermine rather than enhance investor protection.”

Lisa Bleier, associate general counsel and managing director for public policy and advocacy at Sifma, says Roper’s interpretation of Sifma’s proposal is too simplistic. “There’s more to it than that.”

Without commenting specifically on Roper’s characterization of ICI’s intentions, a spokeswoman for the group says ICI “strongly supports a workable conduct standard that puts the best interest of retirement and retail savers first, and we look forward to continued dialogue with the SEC as it develops such a standard.”

Bleier says Sifma was previously pushing for a uniform fiduciary standard but has since backed down after acknowledging the obstacles involved in taking that path. “We all recognize that, at this point, finding a uniform standard of care is very challenging.”

Sifma is now “asking the SEC to consider a separate best-interest standard for broker-dealers, but one that would cover all products … [I]t would be uniform in that any interaction a client has with a broker-dealer would be covered by a single standard.”

When asked how that would differ from the suitability standard that broker-dealers are subject to, she says it “encompasses a duty of loyalty, a duty of care and enhanced upfront disclosures.”

When pressed about the enhancements, she says it would involve a “heightened and more stringent best-interest standard,” a “closer look at the examination oversight” and “specifics that can be added to duty of loyalty and duty of care.”

Roper says “getting a watered-down, disclosure-based standard doesn’t require broker-dealers to change any of the harmful practices that encourage and reward advice that’s not in the customer’s best interest.”

Bleier disagrees with Roper’s assumptions. “We already have a regulatory regime that works in the broker-dealer space. There is already robust regulatory oversight. If the SEC takes this on and applies the standard for broker-dealers across the board, across all products, then it will be even better.”

Roper says the “irony” is that if the SEC adopts Sifma’s proposal, “the protections for investors would arguably be weaker than they are today – weaker than what we have in the Advisers Act and in the Suitability Standard.”

Citing examples of weaker protection, Roper points to Sifma’s proposal that “a broker-dealer shall act in the best interest of such customer at the time the recommendation is made, and shall not have a continuing duty to the customer after making the recommendation.”

“Right now, investors go into arbitration against broker-dealers on the basis of ongoing advice and the investors sometimes win,” she says. “If Sifma’s approach were to be adopted, investors would be less likely to win those claims.”

But forcing broker-dealers to have a continuing duty to their customers after making their recommendations would disadvantage investors because the costs associated with that ongoing duty would be passed on to the investors, Bleier says.

“Most individuals who invest don’t need somebody standing over their shoulder providing an ongoing duty of care that they would then have to pay for,” she says. “There are so many situations when an ongoing duty of care is not necessary, not appropriate or not of interest to the investor.”

Examples of those are broker-dealer clients who are retired and are in payout status or clients who are only investing in bonds, she says.

Barbara Roper

Roper says based on her own assessment of the Sifma proposal, “the only thing that is enhanced” is the addition of conflict disclosures – but even that is flawed. “That puts the entire weight of investor protection on these disclosures; that investors will understand the differences between broker-dealers and advisors, and that investors will understand the conflicts of interest.”

Sifma’s intent to push for a separate best-interest standard for broker-dealers that would cover all products and all interactions with investors would be weaker than the Employee Retirement Income Security Act of 1974, Roper says.

She notes that Congress “specifically and intentionally” adapted a higher standard under Erisa for retirement investment advice that existed under the securities laws “because retirement money is special; these are tax-advantaged accounts.”

“There are important public policy reasons why we care about people’s retirement savings; these are the most vulnerable investors who invest primarily or exclusively through retirement accounts,” she says. “If the SEC prioritizes having a harmonized standard, then it needs to be harmonized up and not down.”

The SEC is not yet considering any rule-making related to the fiduciary standard. Clayton has been collecting public comments from retail investors and other interested parties on standards of conduct for investment advisors and broker-dealers for his own evaluation. Clayton says the inputs will “advance and inform the SEC’s assessment of possible future actions.”

It’s unclear how any version of a uniform fiduciary standard – whether across all advisors, across all investors, across all products, or some combination of those – would work, given the various jurisdictions of regulators.

In terms of oversight, there’s the DOL’s Erisa standard for qualified retirement accounts, Finra oversight for broker-dealers, and standards arising from securities laws governing the SEC for investment advisors.

In terms of products, securities and variable annuities are regulated by the SEC, whereas fixed annuities are regulated by state insurance commissioners through the National Association of Insurance Commissioners.

“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. Earlier this year, Nevada imposed, effective July 1, a statutory fiduciary duty on broker-dealers and investment advisors to act in the best interest of their clients and comply with disclosure requirements.