Much of the Dodd-Frank Financial Reform Legislation passed by Congress is broad-brush painting with the critical details to be contained in regulations created by the Securities and Exchange Commission. For investors, one of the most important of these regulations will determine whether brokers will be held to a fiduciary duty standard, and ? most importantly ? what the scope of that standard will be. As Bloomberg recently reported, the SEC has received about 2,700 comments on the fiduciary standard, and its report is due to Congress in January (“Insurance Agents Ask U.S. Regulators: Don’t Make Us Put Our Clients First,” September 2, 2010).
As the article’s title indicates, insurance agents who sell variable products are against any fiduciary standard at all, even the watered-down standard being pushed by the brokerage industry. They fear that the required disclosures of their conflicting interests will “alienate middle-income investors.”
It is a foregone conclusion that the standard that emerges will be called a “fiduciary” standard. The Securities Industry and Financial Markets Association (“SIFMA”) is fighting tooth and nail to water-down that standard while paying lip-service to the need for a uniform fiduciary standard.
In a nutshell, SIFMA wants the standard to be limited to the disclosure of conflicting interests, but a true fiduciary is required to act in the client’s best interest at all times. That distinction ? between a requirement to merely disclose a conflicting interest versus the requirement to always act in the client’s best interest ? is critical. SIFMA wants firms to able to act in ways that are not in a client’s best interest as long as the conflicting interest is disclosed. But “disclosure” of information should tend to dampen demand for a product is a Madison Avenue art form that is really designed to mislead rather than inform.
The major brokerage firms already make vaguely-worded potential conflict disclosures on the backs of transaction confirmations that are sent to clients. They want to continue that practice, which leaves them free to act in their own best interest rather than their clients’.
Securities and Exchange Commission (SEC) Commissioner Luis Aguilar has consistently stated that Congress should mandate that all providers of investment advice, including broker-dealers, should be subject to the fiduciary standards imposed by the Investment Advisers Act of 1940 (Advisers Act). The United States Supreme Court has held that an investment advisor owes its clients more than honesty and good faith, and that it has an affirmative duty to of utmost good faith to act solely in the best interest of the client, in addition to making full disclosure of all material facts, including conflicting interests. Likewise, the SEC is on record as indicating that investment advisors have a specific duty to refrain from effecting securities transactions that are inconsistent with client interests.
This is the fiduciary standard advocated by Commissioner Aguilar, and it should be the one reported by the SEC to Congress in January, notwithstanding the industry’s reluctance to be bound by it.
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