Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, September 1, 2011

The Uniform Fiduciary Duty Standard for Securities Professionals -- Part II

In my August 31 post I described the January 2011 SEC staff report recommending adoption of the “uniform fiduciary standard,” which the study describes as follows:

“the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” 

In comments filed with the SEC in July, the Securities Industry and Financial Markets Association (SIFMA) stated that the SEC staff study “raised the serious concern among our member firms that the SEC may be contemplating an ‘overlay’ on broker-dealers of the existing Advisers Act standard.”  While SIFMA stated that it supports development of a uniform fiduciary standard, in fact its position (as it was in the debate that preceded enactment of Dodd-Frank) is that the different operating models of broker-dealers and investment advisers make a uniform standard of conduct inapposite.  Accordingly, in its comment letter SIFMA first reiterates its argument against the application of the Investment Advisers Act fiduciary duty to broker-dealers.  It then advocates for “a new articulation” of a uniform fiduciary standard, as follows:

[T]he general fiduciary duty implied under Section 206, which derives from the traditional, generally understood and accepted common law, would be newly articulated as the uniform standard.  Under Section 211 of the Advisers Act and Section 15 of the Exchange Act (as authorized by the Dodd-Frank Act), the SEC would issue rules and guidance to provide the detail, structure and guidance necessary to enable broker-dealers to apply the fiduciary standard to their distinct operational model. In addition, while many parallels would occur, existing Section 206 investment adviser case law, guidance, and other legal precedent would continue to apply to investment advisers, but would not likewise apply wholesale to broker-dealers, in recognition that broker- dealers provide a different range of products and services, and operate under a distinct operational model.

SIFMA’s approach, apart from invoking the rhetorical flourish of   “fiduciary duty,” would not impose many, if any, additional obligations or constraints on broker-dealers.  Conflicts of interest would not be eliminated, but should be addressed through disclosure and consent.  Principal trading would be expressly preserved.  Brokers would not owe a continuing duty of care to customers.  A broker-dealer’s obligations to a retail customer would be defined, and could be limited, in the customer agreement.  Traditional types of broker-dealer products (sale of proprietary-only products) and compensation arrangements (including not only commissions but annual marketing or distribution fees on mutual funds, revenue sharing or shareholder accounting) would not violate the standard of conduct so long as disclosed.

The SIFMA comment is largely fighting battles that it already won in the debate leading up to enactment of § 913.  First, Congress considered, but rejected, a legislative repeal of the broker-dealer exemption in the Advisers Act that would have effected ipso facto a truly uniform standard.  Second, § 913(g) expressly protects broker-dealers from a rigorous application of a fiduciary duty in three respects:  (1) “The receipt of compensation based on commission or other standard compensation for the sale of securities  shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer;” (2) “Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities;” and “The sale of proprietary or other limited range of products by a broker or dealer shall not, in and of itself, be considered a violation of the standards….” Third, by authorizing the SEC to adopt conduct standards “no less stringent than the standard applicable to investment advisers under sections 206(1) and (2),” but not including section 206(3), Congress may have intended to withhold from the SEC the power to prohibit broker-dealers from principal trading.  Although the broker-dealer industry fared well in Congress, apparently SIFMA has heard its membership express anxiety that these previously-won victories may be in jeopardy.

I will describe the positions of the investment adviser community in future posts.

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