By Cyril Tuohy
Rule-making options surrounding uniform fiduciary standards for broker-dealers and investment advisors are “an immediate and high priority,” Securities and Exchange Commission (SEC) Chairwoman Mary Jo White said.
White, speaking at a meeting of the Consumer Federation of America (CFA), also said she had directed her staff to “evaluate all of the potential options available to the commission.”
“I have asked the staff to make the evaluation of potential options an immediate and high priority so that the commission has the information it needs to come to a decision as to whether and, if so, how best to exercise the authority provided in Section 913 of the Dodd-Frank Act,” she told the CFA. “I have made this a priority because it is very important and we need to move forward to a decision.”
White declined to give a specific date when more rule-making specifics around the standards would be released.
Under Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has the authority to impose a uniform standard of care for broker/dealers and financial advisors, both of whom provide similar services to retail clients.
When advising retail investors, broker/dealers are only required to meet a “suitability” threshold, while investment advisors are required to meet a fiduciary standard, which is considered a higher standard of care.
But investors often don’t know the difference between a suitability standard and a fiduciary standard, much less that such a distinction even exists. Critics of the financial advisory industry point to the conflicts of interest inherent in the suitability standards.
“Investment advisors are fiduciaries to their clients, and, as such, generally must put their clients’ interests above their own and avoid, or disclose, conflicts of interest when providing investment advice,” White said.
Broker/dealers, in contrast, are “not uniformly considered a fiduciary to its customers,” although they are regulated under the Securities Exchange Act of 1934, and have an obligation to recommend a “suitable” investment to customers, she said.
“Whenever you have substantially similar services regulated differently, I believe it is necessary to consider carefully whether the regulatory distinctions make sense,” White said.
Some financial advisor groups like the National Association of Financial and Insurance Advisors (NAIFA), which represent fee-only and commission-based advisors, say that requiring a fiduciary standard would cause advisors to drop some of their Main Street clients.
Clients unlucky enough to be dropped from an advisor’s client roster would be left with no advice at all, and would be worse off than if they had advice deemed merely suitable.
Other advisor groups like the National Association of Personal Financial Advisors, which represent fee-only advisors, back a fiduciary standard.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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