Fiduciary duty includes both a duty of care and a duty of loyalty. Collectively, and generally speaking, these duties require a fiduciary to act in the best interest of the customer, and to provide full and fair disclosure of material facts and conflicts of interest.
Today, financial advisers and broker-dealers are regulated by different laws. The current system, established in the 1940s, leaves states free to develop their own often conflicting definitions of fiduciary standards. This can confuse investors and lead to inconsistent definitions and interpretations under existing state law.
As part of its comprehensive financial regulatory proposal in 2009, the Obama Administration proposed to standardize the care that investors receive from financial professionals, whether financial advisers or broker-dealers at the federal level.
The Dodd-Frank Act directed the Securities and Exchange Commission (SEC) to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. The Act further authorized the SEC to establish such a standard if it saw fit.
Separate from and conflicting with the definition of fiduciary being contemplated under Dodd-Frank, in 2010, the Department of Labor (DOL) proposed a wholesale revision to its regulation that redefines what it means to be a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. This proposed definition would have affected whether retail brokers, prime brokers, institutional trading desks, swap dealers, and others who work with pension and 401(k) plans and IRAs will be deemed fiduciaries under certain circumstances. On September 19, 2011, DOL announced it would re-propose its rule on the definition of a fiduciary. The new proposed rule is expected to be issued in early 2014.
See SIFMA's issue on DOL Fiduciary Standard ›
Since early 2009, SIFMA has consistently advocated for the establishment of a new uniform fiduciary standard, and not application of the Advisers Act fiduciary standard to broker-dealers.
The new standard envisioned by SIFMA would: put retail customers' interests first; provide adequate flexibility to preserve and enhance customer choice of and access to financial products and services, and capital formation; provide for conflicts management; apply only to, and be tailored for, those services and activities that involve providing personalized investment advice about securities to retail customers; and not subject financial professionals to other fiduciary obligations (for example, the Advisers Act fiduciary standard, or other statutory standards).
SIFMA, through our member committees and otherwise, continues to engage policymakers and regulators with comprehensive empirical and legal analysis to help inform the process. We are hopeful that our substantive engagement and input will positively impact any rulemaking or other actions on this issue.
When considering the Department of Labor's (DOL) definition of fiduciary under the Employee Retirement Income Security Act (ERISA), the consequences for a broker being deemed a fiduciary include potential prohibitions on engaging in principal transactions, as well as difficulty receiving fees or commissions.
As written, SIFMA believes the proposed rule would ultimately harm investors by raising the cost of saving. SIFMA is working with the DOL through the regulatory process to avoid the harmful effects of this proposed rule.