Brokerage industry lobbyists and SEC Chairman Mary Shapiro are trying to change draft legislation to water down duties owed by brokers to customers. Specifically, they are trying to persuade the Senate Banking Committee to eliminate provisions in a draft bill that would require brokers who provide investment advice to act in the best interest of their clients ? that is, to act as fiduciaries. See Sara Hansard’s Feb. 7 InvestmentNews article, “Consumer groups say brokers may dodge fiduciary requirement.”
Ms. Shapiro is the former CEO of the Financial Industry Regulatory Authority (FINRA), which is funded by its brokerage firm members.
Consumer groups ? including the Consumer Federation of America, AARP, and others ? sent a letter to Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala., calling for the fiduciary standard to be retained.
Ms. Schapiro and the brokerage industry want to “water down” the fiduciary standard by replacing it with FINRA’s so-called suitability rule. In fact, they are pushing the Senators to sidetrack the whole thing by commissioning a “study” whether to “harmonize” the two standards.
In addition to millions of lobbying dollars spent by insurance and brokerage firms, “we also have Finra spending money on Capitol Hill to really decimate any chance of a meaningful Investment Advisers Act fiduciary standard that would inure to the benefit of individual investors in this country,” said Denise Voight Crawford, Texas Securities Commissioner and President of the association of state securities regulators known as the NASAA.
In public, Ms. Shapiro and the SEC have taken the position that the suitability standard is equal to or greater than the fiduciary standard of care imposed by the Investment Advisors Act of 1940. But that is simply not true.
In terms of investor protection, the difference is huge. The fiduciary standard includes, but goes beyond, the requirement that a broker only recommend a security if it is suitable for the customer based on that customer’s investment objectives, risk tolerance and financial situation. A fiduciary must always put the client’s interest ahead of his or her own. By contrast, a non-fiduciary is not required to avoid conflicts of interest.
FINRA’s current CEO, Richard Ketchum, admits that the suitability standard is not equivalent to the fiduciary standard. Seeming to choose his words carefully, he stated: “I certainly didn’t mean to suggest that suitability is a higher standard of care than the fiduciary standard,” he said. “The fiduciary standard is a different standard from suitability, and it is a very high standard,” Mr. Ketchum said. See “Finra walks fiduciary/suitability tightrope,” InvestmentNews, May 17, 2009, Sara Hansard.
Columbia University School of Law professor John Coffee explained: Suitability rules “are precise and bright-line.” By contrast, fiduciary principles “are much more aspirational and general.” If brokers assumed fiduciary duties and also had to comply with suitability rules, “that would be optimal,” Professor Coffee said.
“In the past week or so, troubling reports have emerged that the committee may be considering eliminating [draft legislation] requirements that brokers that provide investment advice act in the best interests of their clients,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
“Responding to a campaign of misinformation and scare tactics by broker and insurance industry lobbyists, some committee members appear to be leaning toward replacing that provision with a meaningless requirement for a new study,” she said.
Speaking at the press conference, Ms. Roper said: “An army of industry lobbyists has descended on the Senate Banking Committee,” trying to convince members that brokers and insurance agents would be unduly burdened by having to act as fiduciaries. Contrary to claims by the brokerage industry, requiring brokers giving advice to act as fiduciaries would not deny investors choice, she said; instead, it would simply “limit the ability of brokers to advise investors to make bad choices.”
“We don’t need another study,” Ms. Roper said. A 2008 study conducted by the Rand Corp. for the SEC concluded that investors are confused by the differences between brokers and investment advisers, she said. Customers believe their brokers are financial advisors because firms hold their brokers out as trusted financial advisors rather than as securities salesmen.