Fiduciary Standard for Brokers Backed by SEC Advisory Panel

Investment brokers advising retail customers would face a standard requiring them to recommend products in the best interest of clients under a proposal from a U.S. Securities and Exchange Commission advisory panel.

Members of the SEC’s Investor Advisory Committee voted today to recommend imposing a fiduciary duty on brokers who provide personalized investment advice. Brokers now are required only to steer clients toward trades or investments deemed suitable, while investment advisers are obliged to put clients’ interests first.

“There is behavior that is permissible under a suitability standard that isn’t in the best interest of the customer,” Barbara Roper, an advisory panel member who is director of the Consumer Federation of America, said before the vote. “Investors end up squandering money to pay excessive fees for mediocre investment options -- not in every case -- but it is permissible under the existing standard for brokers.”

The Dodd-Frank Act of 2010 called on the SEC to study the existing standards for providing personalized advice after customers lost millions of dollars on poorly understood investments during the credit crisis. In a January 2011 staff study, the agency said many retail investors are confused by the different roles played by investment advisers and brokers and recommended a uniform fiduciary standard apply to both.

As a first step toward new rulemaking, the SEC requested information in March from the industry and public on the costs and benefits of imposing a fiduciary duty.

$45 Trillion Managed

The SEC and the Financial Industry Regulatory Authority oversee 4,195 brokerage firms holding more than 113 million retail and institutional accounts, according to Finra. The SEC oversees more than 11,000 investment advisers managing more than $45 trillion, according to a report by the Treasury Department’s Office of Financial Research.

Brokers who give customers recommendations to buy, sell or hold a security and don’t provide advice wouldn’t have a fiduciary duty under the committee’s approach. Those who “hold themselves out” as advisers, “based either on the titles they use or the manner in which they market their services” should have a fiduciary duty, the committee said in its recommendation.

Investment advisers, who work under a strict standard of duty and loyalty, have pushed the SEC to impose equivalent rules on brokers, who can wind up providing advice during the process of executing orders for customers.

Uniform Standard

The Securities Industry and Financial Markets Association, the main lobbying group for Wall Street firms, opposes the recommendation because it seeks to apply to brokers laws written for investment advisers, the group said in a comment letter.

Sifma supports a uniform fiduciary standard written under the laws that apply to brokers, which takes into account their business model, said Kevin M. Carroll, the group’s managing director and associate general counsel.

“We see legal and practical problems with imposing that existing regime on broker-dealers,” Carroll said in a telephone interview.

The five-member SEC may be divided over the topic. While Democratic Commissioner Luis A. Aguilar has said he supports extending fiduciary duty to brokers providing investment advice, Republican Commissioner Daniel M. Gallagher has said he isn’t convinced new rules are needed.

The proposal “is a nudge, it’s a reminder this is an important priority for investors,” Roper said in a telephone interview. “It also puts down the markers of what a fiduciary standard ought to include and ought to look like and how the commission should approach it.”

SEC Chairman Mary Jo White said last week that the SEC’s effort has “real traction.” White hasn’t stated whether she personally supports imposing a fiduciary duty on brokers.

“It’s a high priority for me to figure out where we are going with respect to that,” White said Nov. 12 at Sifma’s annual meeting in New York. “You’ve got brokers and investment advisers, particularly at the retail level who are providing the same advice to retail investors. Retail investors are not entirely sure who they’re dealing with.”

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