Pennsylvania + Wall


Pennsylvania + Wall provides commentary on a broad range of current financial, economic and regulatory reform topics. The views expressed are those of the authors, and do not necessarily reflect the position of SIFMA.

April 04, 2012

Putting Investors’ Best Interests First

By Ira Hammerman

Fiduciary duty - handshake

SIFMA has long supported a uniform fiduciary standard for brokers and investment advisors who provide personalized investment advice to individual retail customers.  We’ve testified to that fact, provided comment letters and studies, and offered up a framework as to how a uniform fiduciary duty can be written. Yet, InvestmentNews ran an excerpted blog post today from an analyst that not only distorts our position; it misrepresents key facts in this debate. 

In the analysis, author Michael Kitces, praises a letter by numerous trade associations that comments directly on the framework SIFMA submitted to the SEC in July 2011.  He, and many other news outlets, focused solely on the differences between these groups and our framework.  Yet, if you read our framework and their letter, you’ll notice that there is a great deal of agreement between the two sides. 

Nevertheless, Mr. Kitces from the very outset seeks to misrepresent SIFMA’s position.  In his post he says that SIFMA has “generally opposed the rule and argued for a separate standard.”  That’s simply factually inaccurate.

What we have long called for is one, single uniform fiduciary standard of care that applies to both brokers and investment advisors when they provide personalized investment advice to individual retail customers.  We’ve had a bifurcated set of rules for brokers and advisors for long enough, and we believe through SEC rule making that status quo should end.

That standard, however, should not favor one type of business over another. Simply overlaying the Investment Advisors Act of 1940 (‘40 Act), as our fellow trade associations and Mr. Kitces himself support, won’t satisfy the business-neutrality prerequisite, which also happens to be codified in the Dodd-Frank Act.

The ’40 Act would subject brokers to often duplicative and burdensome regulations that were never meant to apply to them.  That’s what the Securities Exchange Act of 1934 is for. 

As for the matter of commission based compensation that Mr. Kitces discusses in his post: Dodd-Frank when it laid the groundwork for SEC rulemaking, specifically cited that any fiduciary standard of care should preserve commission-based services.  This isn’t a “concession” as Mr. Kitces suggests our fellow trades are making, it’s accepting the reality of how a fiduciary standard would exist under Dodd-Frank. 

The foundation of a fiduciary standard of care is the principle that the customer’s best interests should be put first.  SIFMA agrees with that principle and it is the foundation for our framework. 

We believe, however, that part of putting a customer’s best interests first is affording them the ability to choose what products and services best meet their investment needs and goals.  Whether it’s a fee-based account or an investment strategy managed by broker charging commissions for every transaction, the standard of care should be the same, and it should not favor one service over another. 

For the first time in nearly 70 years, the entire financial community seems to finally come to the same conclusion: if a broker or advisor is providing personalized investment advice to an individual retail investor, that broker or advisor should be held to a fiduciary standard.  While certain groups will almost certainly disagree on the details of how we get there, we shouldn’t lose sight of the end goal we all share. 

And as we debate those details moving forward, we should do so with facts and data that aren’t distorted by biased opinions.  That way, we can give the SEC the best chance of writing a new uniform standard that protects investors and works across business models.  And once the SEC writes the new fiduciary standard, perhaps they can turn their attention to the remaining two fundamental differences between the broker and adviser regimes. Namely, allow investors to bring claims for damages against their adviser when the adviser breaches the fiduciary duty (they already can bring claims against their broker) and, second, work with Congress to establish an SRO for advisers (like FINRA exists for the brokers) so they are examined a little more often than the current SEC exam rate of once every 11 years. The same service should be subject to the same fiduciary standard, the same customer dispute resolution mechanism, and the same level of regulatory oversight. Once the adviser community status quo gives weight to these three levels of parity, individual investors will finally be fully protected.

Before writing his blog post or before InvestmentNews decided to publish an excerpted version of it, SIFMA should have been contacted to offer its views.  That way, those that read either publication wouldn’t have been misled from the beginning.

Ira Hammerman
Senior Managing Director and General Counsel




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