SEC Fiduciary Standard

" The IAA continues to believe that all financial professionals who provide investment advice about securities to clients should be subject to the same high standard of care – the fiduciary duty standard under the Advisers Act."

SEC Fiduciary Standard

The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should be subject to the fiduciary duty embodied in the Investment Advisers Act of 1940.

Overview

Blurring the lines. For over two decades now, there has been a blurring of the bright line that traditionally separated brokerage services from investment advisory services as broker-dealers have increasingly migrated toward investment advisory activities. Yet significant differences remain between the core business activities of investment advisers and broker-dealers.  Moreover, under current law, investment advisers are subject to a stringent overarching fiduciary duty, whereas broker-dealers are not.

Current legal standard. As fiduciaries, investment advisers are required to act in the best interest of clients and to place the interests of clients before their own. We have consistently taken the position that the fiduciary standard should apply to all professionals in the business of providing investment advice about securities to clients.  However, broker-dealers that provide investment advice are not subject to such a standard if they (1) provide investment advice “solely incidental” to the conduct of their business as a broker-dealer, and (2) receive no “special compensation” for such services. Instead, broker-dealers are subject to a separate regulatory framework under the Securities Exchange Act of 1934 requiring them to ensure that the advice they give is “suitable.”

Investor confusion. Unfortunately, investors are typically unaware of these important distinctions and may not fully understand or appreciate the standard of conduct that applies to the advice or recommendation they are receiving. Indeed, investors believe that those who give them investment advice are – and should be – required to act in their best interest. Moreover, investor confusion is exacerbated when financial professionals use titles or otherwise hold themselves out to clients in a manner that implies a fiduciary “relationship of trust and confidence” while disclaiming fiduciary responsibility to such clients.

Addressing the issue. In recent years, Congress and the SEC have questioned the effectiveness of existing standards of conduct for broker-dealers and investment advisers in providing personalized investment advice about securities to retail customers, and whether there are gaps, shortcomings or overlaps in those standards. The IAA has participated actively in policymakers’ consideration of this important investor protection issue.

In particular, the SEC has previously considered a broad range of potential actions on this issue, including: (i) maintaining the existing regulatory structure; (ii) requiring enhanced disclosures; (iii) developing a best interest standard of conduct for broker-dealers; and (iv) pursuing a single standard of conduct that would “harmonize” investment adviser and broker-dealer rules and regulations. As discussed below, the IAA supports the third option—developing a best interest standard for brokers as robust and investor-protective as the fiduciary standard.

“Investor confusion is exacerbated when financial professionals use titles or otherwise hold themselves out to clients in a manner that implies a fiduciary ‘relationship of trust and confidence’ while disclaiming fiduciary responsibility to such clients.”

Position

The IAA continues to believe that all financial professionals who provide investment advice about securities to clients should be subject to the same high standard of conduct – the fiduciary duty standard under the Advisers Act. We believe that:

  • Maintaining the existing regulatory structure – the first option listed above – will do nothing to enhance investor protection for customers of broker-dealers or lessen investor confusion.
  • Pursuing a single "harmonized" standard of conduct would not effectively serve investors because it would result in a weakening or "watering down" of the existing robust fiduciary standard applicable to investment advisers – an outcome the IAA strongly opposes.
  • Merely requiring enhanced disclosures is not sufficient. While disclosure of conflicts and other material information is crucial, financial professionals that provide advice regarding securities should first and foremost be bound by a duty to act in a client's best interest.

The SEC should focus its efforts on the standard of conduct for brokers and refrain from rulemaking that would affect the robust fiduciary principles already embodied in the Advisers Act.

Specifically, the SEC should:

  • Affirm that all persons who provide discretionary investment advice or advice for a fee to clients are subject to the fiduciary duty standard under the Advisers Act.
  • Adopt a new best-interest standard of conduct under the Exchange Act for broker-dealers when making nondiscretionary investment recommendations to retail customers that is no less stringent than the Advisers Act fiduciary standard and that similarly encompasses the overarching principles of loyalty and care.
  • To the extent that the SEC does not adopt an equally stringent standard under the Exchange Act, it should prohibit firms or individuals that are not subject to the Advisers Act fiduciary standard from holding themselves out in a manner that implies a fiduciary relationship.

The IAA looks forward to continuing to working with all interested parties, including the SEC and its staff, in addressing this vital investor protection issue.

Resources

IAA Advocacy

“The SEC should focus its efforts on the standard of care for brokers and refrain from rulemaking that would affect the robust fiduciary principles already embodied in the Advisers Act.”