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SEC Recommends Common Fiduciary Standard for Brokers, Investment Advisers

The U.S. Securities and Exchange Commission is recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice.

The SEC said there’s a need for a uniform fiduciary standard “no less stringent than currently applied to investment advisers,” according to the staff report delivered to Congress yesterday. The common standard is needed because many retail investors don’t understand and are confused by the roles played by investment advisers and broker-dealers, the study said.

The agency was asked by Congress to look at the effectiveness of existing rules as part of the Dodd-Frank financial services overhaul law enacted on July 21. Broker- dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when a product is sold, instead of the fiduciary duty followed by registered investment advisers to put their clients’ best interests first.

“For decades, the SEC has stood by and allowed brokers to market themselves to investors as trusted advisers without requiring them to meet the most basic standard appropriate to that role -- a fiduciary duty to act in their customers’ best interests,” Barbara Roper, director of investor protection for the Consumer Federation of America, said in an e-mail. “We are encouraged by reports that suggest the commission has taken the first essential step toward correcting this anti-investor policy,” said Roper, who hasn’t fully reviewed the report.

Investor Sophistication

Retail customers “may not necessarily have the sophistication, information, or access needed to represent themselves effectively in today‘s market and to pursue their financial goals,” the study said.

Republican commissioners Troy Paredes and Kathleen Casey issued a joint statement opposing the study as written. The report “does not adequately recognize the risk that its recommendations could adversely impact investors,” according to the statement.

They also argued against any immediate use of the report to justify SEC rulemaking. “Given the lack of concrete data provided in the study and the need for additional research and analysis, we believe that any rulemaking without such consideration would be ill-conceived at best and harmful at worst,” the statement said. There’s no statutory deadline for adopting any rules to implement the standard, they said in the statement.

Uniform Standard

Seventy-six percent of about 1,300 investors surveyed said they thought financial advisers, a term used by major brokerage firms such as Bank of America Corp.’s Merrill Lynch to describe their salespeople, must uphold a fiduciary duty to their customers, according to a study released in September by groups including the Consumer Federation of America and the North American Securities Administrators Association, both based in Washington.

The Securities Industry and Financial Markets Association, the lobbying group for banks and brokerages, had said it supported a “uniform federal fiduciary standard” for those brokers dealing with retail clients. It had also said the existing standard should be revised since having brokers follow the same fiduciary standard as registered investment advisers, which is based on the Investment Advisers Act of 1940, is incompatible with the broker business model.

The study acknowledged the “historically different functions and activities of investment advisers and broker- dealers” and said the proposed fiduciary standard “would be an overlay on top of the existing investment adviser and broker- dealer regimes and would supplement them, and not supplant them.”

‘More Difficult’

“It’s possible to be a fiduciary in different business models, but some models are more difficult than others,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of investment industry leaders and practitioners, according to its website, in an interview today. “If brokers just have to disclose and not mitigate conflicts then you’re eliminating the fiduciary standard as it currently exists,” said Rostad, who’s based in Falls Church, Virginia.

The study appears to preserve the ability of consumers to have access to various fee and account structures when investing, Ira Hammerman, general counsel for Sifma in Washington, said in a telephone interview yesterday. “I don’t see any major impediment to the continuation of the robust broker-dealer model, but that is something we will continue to be concerned about.”

The report also recognized the need for written guidance to broker-dealers and investment advisers on how the uniform standard would be applied, which is important as the SEC moves into the rulemaking phase, he said.

‘New Tool’

There will be more litigation brought by the SEC under the uniform fiduciary standard because it will serve as a “new tool” to bring proceedings against brokerage firms and individual brokers, said Arthur Greenspan, an attorney specializing in SEC enforcement and securities litigation at Richards Kibbe & Orbe LLP in New York, before the report was delivered.

The SEC and the Financial Industry Regulatory Authority oversee about 5,100 broker-dealers, according to the SEC. In 2009, those registered with Finra held more than 109 million retail and institutional accounts, with about 18 percent of those brokers also registered as investment advisers with a state or the SEC.

Rules and Studies

Total assets managed by brokers registered with Finra and registered investment advisers were $10.37 trillion at the end of 2009, according to Boston-based consultant Cerulli Associates.

The SEC is creating more than 100 rules and completing 20 studies required by Dodd-Frank, SEC Chairman Mary Schapiro said in Sept. 30 testimony before the Senate Banking Committee. The fiduciary study was among the first, and follows a Jan. 19 report that recommended three options for Congress to improve oversight of registered investment advisers, including having Finra oversee dually registered advisers. The agency also approved rules this week requiring more disclosure for investors who trade asset-backed securities.

To contact the reporters on this story: Alexis Leondis in New York aleondis@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editors responsible for this story: Rick Levinson at rlevinson2@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net

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