SEC Recommends Uniform Fiduciary Standard
January 24, 2011 by Arthur D. Postal
Published 1/21/2011
The U.S. Securities and Exchange Commission (SEC) staff has recommended a “uniform fiduciary standard of conduct” for broker-dealers and investment advisors who are selling retail investment products.
“When broker-dealers and investment advisers are performing the same or substantially similar functions, the SEC should consider whether to harmonize the regulatory protections applicable to such functions,” SEC staffers say in the standard of care report.
The SEC staff conducted the study to comply with Section 913 of the Dodd-Frank Wall Street Reform and Financial Services Act. The study will be presented to the Senate Banking Committee and the House Financial Services Committee, but Dodd-Frank Act Section 913 gives the SEC the authority to implement the staff recommendations.
The SEC staff says SEC regulations should state that the standard of conduct for all brokers, dealers and investment advisors “shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”
In implementing a uniform fiduciary standard, the SEC “should engage in rulemaking and/or issue interpretive guidance addressing the components of the uniform fiduciary standard: the duties of loyalty and care,” the staff says.
SEC commissioners “should identify specific examples of potentially relevant and common material conflicts of interest in order to facilitate a smooth transition to the new standard by broker-dealers and consistent interpretations by broker-dealers and investment advisers,” the staff says.
The SEC staff says it believes that “the existing guidance and precedent under the Advisers Act regarding fiduciary duty, as developed primarily through [SEC] interpretive pronouncements under the antifraud provisions of the Advisers Act, and through case law and numerous enforcement actions, will continue to apply.”
The two Republican commissioners on the SEC, Kathleen Casey and Troy Paredes, are opposing the staff recommendations.
The SEC staff has recommended harmonization of two disparate regulatory regimes, “without adequate articulation or substantiation of the problems that would purportedly be addressed via that regulation,” Casey and Paredes say in a statement.
The staff “does not adequately recognize the risk that its recommendations could adversely impact investors,” Casey and Paredes say.
The SEC now requires investment advisors who provide personalized financial advice to use a fiduciary standard of care. Securities brokers and insurance producers who sell products such as variable annuities use a suitability standard, meaning that they must verify that the products they sell to consumers suit the consumers’ needs. Planner groups have been lobbying for a uniform fiduciary standard; insurance producer and broker-dealer groups have generally supported keeping the suitability standard for securities brokers and life insurance agents.
