Handle with Care: Creating a Fiduciary Standard

By David Bellaire, Financial Services Institute’s executive vice president and general counsel, originally published in InvestmentNews.

In the post-2008 world, investor protection is a more crucial priority than ever for every firm, financial adviser and regulator in the financial services industry.

David BellaireAs the Securities and Exchange Commission’s recent request for information regarding standards of client care among broker-dealers and investment advisers shows, the process of crafting appropriate regulations to protect investors while ensuring their continued access to objective professional financial advice continues.

As with any proposed change in regulation, it is vital that broker-dealers, advisers, advocacy organizations and regulators work together to ensure that any resulting rules achieve the right balance between increased investor protection and costs for investors. After all, in order for Main Street Americans to get the sound financial advice and guidance they need, advisers need clear guidance that allows them to serve their clients with confidence that they are complying with their regulatory requirements.

In the post-2008 world, investor protection is a more crucial priority than ever for every firm, financial adviser and regulator in the financial services industry.

As the Securities and Exchange Commission’s recent request for information regarding standards of client care among broker-dealers and investment advisers shows, the process of crafting appropriate regulations to protect investors while ensuring their continued access to objective professional financial advice continues.

As with any proposed change in regulation, it is vital that broker-dealers, advisers, advocacy organizations and regulators work together to ensure that any resulting rules achieve the right balance between increased investor protection and costs for investors. After all, in order for Main Street Americans to get the sound financial advice and guidance they need, advisers need clear guidance that allows them to serve their clients with confidence that they are complying with their regulatory requirements.

Clear Guidance

With that in mind, what should independent broker-dealers and advisers look for as the SEC moves forward with its review process and potential consideration of new rules?

Clarity is king.

Independent broker-dealers and registered investment advisers have built their business practices to conform to different regulatory mandates over the course of many decades. RIAs are governed primarily by the Investment Advisers Act of 1940, and its complex and voluminous case law, while independent broker-dealers are subject to the Securities and Exchange Act of 1934 and the rules of the Financial Industry Regulatory Authority Inc.

The distinctions between the two frameworks are substantial. Simply mandating that independent broker-dealers and advisers comply with the 1940 Act in 2013 would be like asking drivers in Boston to use a freeway system built for Los Angeles: The result would be widespread confusion and chaos for both advisers and their clients.

Assuming that the SEC decides to proceed with new rule making once its review of the responses to its information request is complete, the ideal outcome would be a uniform fiduciary standard providing clear guidance for client care to both independent broker-dealers and RIAs based on the realities of both groups’ business models and client relationships. Firms and advisers should be on the lookout for statements from the SEC indicating that the commission is committed to providing broker-dealers and investment advisers with clear guidance on their compliance obligations under the new standard of care.

Effective investor protection and new disclosure requirements aren’t always the same thing. In practical terms, a uniform fiduciary standard is likely to present new disclosure requirements for independent broker-dealers and investment advisers.

As we have seen repeatedly, though, effective investor protection doesn’t come simply from stacks of new disclosure documents. In fact, overly burdensome disclosure and other compliance requirements can hurt investors by discouraging investors from reading the materials provided, driving up the costs of investing and limiting their access to professional advice.

Firms and advisers should pay close attention to statements from the SEC regarding the cost-benefit analysis that it eventually employs as part of its review process.

What new disclosure requirements does it assume? Has it adequately accounted for any new expenses that broker-dealers may incur in complying with these new mandates?

Most importantly, will the new disclosure or reporting requirements improve the level of service and protection that investors receive, or will they simply expand the stacks of paper and attendant costs that advisers are forced to generate in order to “help” their clients?

Transparency is the best policy. The commission’s openness to receiving input from our industry as it begins this review process is a very encouraging sign.

Stay in Touch

Advisers should take advantage of opportunities to make their voices heard through the industry groups they support and should stay in close contact with advocacy associations such as the Financial Services Institute Inc. in order keep up to speed on developments in the process.

As the equity market continues its recent recovery, investors are gradually regaining confidence in their ability to progress toward their financial goals. As Main Street Americans rebuild their retirement accounts and refocus on their long-term investment priorities, independent broker-dealers and advisers will play an ever-more-important role in helping them make sound and informed decisions.

By focusing on the key factors mentioned above, independent broker-dealers and their affiliated advisers can ensure that the SEC and our industry work together to strengthen protections for investors while also allowing advisers to continue to serve their clients with confidence and clarity.

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