SEC Fiduciary Standard

"The IAA continues to believe that all financial professionals who provide investment advice about securities to clients should be required to act pursuant to fiduciary principles."

SEC Fiduciary Standard

The IAA has long advocated that all financial professionals who provide investment advice about securities to clients should be required to act pursuant to fiduciary principles.

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 not place their own interests ahead of their clients. 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 confusionUnfortunately, 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.

“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.”

Recent SEC Proposals

The SEC recently proposed a package of rulemakings and interpretations regarding the standards of conduct for broker-dealers and investment advisers that are designed to enhance retail investors’ protection and reduce their confusion about the advice and services they’re receiving from their investment professional. The package includes: Regulation Best Interest, which is intended to strengthen the standard of conduct for broker-dealers; a short-form four-page relationship summary called Form CRS that both investment advisers and broker-dealers would have to provide their clients before entering into a relationship with them; restrictions on the use of the term “adviser” or “advisor” by broker-dealers that are not also registered as investment advisers; an interpretation regarding the investment adviser fiduciary duty; and a request for comment on whether the SEC should propose rules for advisers in other areas.

The IAA is pleased that, in approving the proposals, all of the Commissioners focused on the importance of public input on all aspects of the package of proposals, including investor testing on the efficacy of proposed new disclosures. The IAA commends the SEC for taking action to raise the standard of conduct for broker-dealers and address investor confusion. But we share concerns expressed by the majority of Commissioners about whether the proposals will actually achieve those objectives, which we view as crucial for investor protection. The IAA is committed to working with the Commission to get this right.

The IAA recently conducted a webinar on the proposals and is currently analyzing the releases. We welcome input from members and will engage fully with the Commission and its staff on these important proposals.

Please contact IAA Legal Staff if you have questions about or would like to discuss the proposals.

Resources

IAA Advocacy

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SEC Statements