Securities Law Prof Blog

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

Monday, September 5, 2011

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

This is the third part of a series of blogs addressing the issue of a uniform fiduciary duty standard for securities professionals that provide personalized investment advice to retail investors.  SEC Chair Schapiro recently stated that the SEC expects to take up this issue later this year.  In addition, the House Financial Services Committee announced a hearing on the standards of care for broker-dealers and investment advisers on Sept.  13. 

 I previously described the January 21, 2011 SEC Staff Study on Investment Advisers and Broker-Dealers required by Dodd-Frank § 913 that recommends adoption of a uniform fiduciary duty standard.  I also described comments on the staff study filed with the SEC on July 14, 2011 by the Securities Industry and Financial Markets Association (SIFMA).   In this post I look at some other reactions to the staff study.

“The SEC Should Slow Down”

1. Opposing Commissioners.   Two SEC Commissioners, Kathleen Casey  (whose term expired August 5, 2011) and Troy Paredes, issued a statement on January 21, 2011 stating that they opposed the study’s release to Congress as drafted and called for additional economic and empirical research.   In essence, they feel that the staff did not do what Dodd-Frank § 913 mandated.  In their view, “the Study’s pervasive shortcoming is that it fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime …. A stronger analytical and empirical foundation … is required before regulatory steps are taken that would revamp how broker-dealers and investment advisers are regulated.”   Accordingly, the study did not fulfill the statutory mandate to evaluate “the effectiveness of existing legal or regulatory standards of care” applicable to broker-dealers and investment advisers.

In particular, the Commissioners fault the study for premising its recommendations on investor confusion without sufficient study of the practical consequences of such confusion and without addressing the possibility that its own recommendations may  not resolve the confusion.  In addition, they criticize the study for failing to account for the potential overall cost of the recommendations.  “The Study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on securities professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for services and advice they do receive.”

2. National Association of Insurance and Financial Advisors (NAIFA).  NAIFA describes its membership as “Main Street financial services professionals who serve middle-market consumers.”  In an April 2011 statement NAIFA expressed the criticisms made by Commissioners Casey and Parades and also introduced an element of class distinction.  According to NAIFA, “data about how the two standards are applied and enforced on Main Street demonstrates that the suitability standard governing broker-dealers is a rigorous consumer protection standard that is arguably a more robust standard than a fiduciary duty.”  In addition, “NAIFA is concerned that the costs associated with increased regulation and liability associated with a fiduciary standard could either drive our members out of the market or to an investment adviser model that primarily serves wealthier consumers.”  Accordingly, NAIFA called upon Congress “to ensure the SEC conducts all of the analysis necessary to ensure any changes to the regulations of broker-dealers achieves three important objectives:

1. It should be supported by facts from the study.
2. It should provide for greater consumer protection.
3. It should not diminish the middle-market consumers’ ability to afford financial services.”

3.     Representative Bachus.  Representative Spencer Bachus, the Chairman of the House Financial Services Committee, expressed his support for the comments of Commissioners Casey and  Paredes in an August 2, 2011 letter to Chair Schapiro and expressed his concern that moving forward with rulemaking was “premature.”   The Financial Services Committee has scheduled a hearing on the issue for Sept. 13.

“The SEC Should Act Now”

In contrast, the SEC staff study’s recommendations have strong support from members of the investment advisory industry, state securities regulators, and consumer advocates.

1.     Financial Planning Coalition (FPC).  The FPC represents nearly 75,000 financial planners and is a collaboration of Certified Financial Planner Board of Standards, Inc., the Financial Planning Association and the National Association of Personal Financial Advisors.  On January 22, 2011 the FPC commended the SEC staff study and called on the SEC to act quickly and promulgate a rule extending the fiduciary standard of care to broker-dealers.  The FPA followed up on its show of support by submitting to the SEC on June 23, 2011 a petition signed by more than 5,200 financial planners urging adoption of the uniform fiduciary standard.  In its cover letter, the FPC cited a recent study showing that “investors remain confused about the advice they receive” and “overwhelmingly believe that all financial professionals who give personalized investment advice should be required to act in the best interest of their clients and disclose conflicts of interest.”

2.     North American Securities Administrators Association (NASAA).  NASAA applauded the SEC staff study’s recommendation and called upon the SEC to move forward quickly to implement the recommendation:

“Applying the fiduciary standard to broker-dealers is necessary to protect investors from abuses fostered by current fragmented industry standards.  The time has come to end this confusion and close the longstanding gaps in industry standards.  The SEC must act without delay.”

3.     Consumer Federation of America (CFA).  The CFA, an association of nearly 300 nonprofit consumer organizations, has strongly supported the adoption of a uniform fiduciary standard.  The CFA reaffirmed its support for the SEC staff study in a May 9, 2011 letter to Chairman Bachus and other members of the House Financial Services Committee, calling it “a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption.”  It argued that proponents of the view that regulation would harm middle income and rural investors “ignore serious short-comings in existing investor protections as well as the significant steps the SEC proposes to take to ensure that the fiduciary duty would be applied in a way that is consistent with the broker-dealer business model.”  In addition, “we believe the best way for the SEC to satisfy the demands to provide a stronger economic basis for rulemaking is to document the significant costs that investors bear and the benefits they lose as a result of conduct that is permissible under a suitability standard but unacceptable under a fiduciary duty.”

Future posts will describe the House Financial Services Sept. 13 hearing as well as other issues involving regulation of securities professionals.

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