Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News January 19, 2009 Issue

Should Brokers Be Subject to a Blanket Fiduciary Duty?

SEC Commissioner Luis Aguilar seems to think so.

In a January 10 speech before a NASAA conference, he indicated that broker-dealers that provide advice should be subject to a fiduciary duty akin to that imposed on investment advisers. "One area to watch closely is the regulation of broker-dealers who provide investment advisory services," said Aquilar. "Historically, broker-dealers that simply effected transactions as directed by their clients generally would not be fiduciaries and had duties focusing on the transaction service they provided. As broker-dealers increasingly provide advice to their clients, the higher standards and fiduciary duties of advisers should also be applied to these broker-dealers."

Heís not the only one who thinks so. Consumers Union, publisher of Consumer Reports, recently asserted that "everyone who offers financial products to consumers should be subject to suitability requirements and fiduciary duties." (The group was commenting on GAOís recent report, "A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System." See related article this issue).

Even some in the brokerage industry have called for brokers to assume a blanket fiduciary role. Fiduciary responsibility is the "next step" in giving clients what they want, said then-Smith Barney CEO Sallie Krawcheck at a November 2007 SIFMA conference. "I realize there is real fear in the industry about the F-word," she said. The fear of fiduciary duty "is not really irrational" because although the brokerage model has "gotten very close" to the fiduciary standard, "itís not quite there yet." And, she said, there is "no question" that "more is at risk" when brokers act as fiduciaries. "But when asked, the clients tell you itís what theyíre looking for."

Krawcheck had an interesting perspective on the Financial Planning Associationís attack on the SECís fee-based brokerage rule: "I would have thought the Street would have actually seen this for what it is, which is a fantastic opportunity for us as an industry to expand the business away from the brokerage model into the investment advisory model, with the ultimate goal of being Ö holistic wealth managers," she said. "Itís my personal opinion that while the FPA may have celebrated mightily for having won the battle, I think theyíre going to lose the war here. Until now, the only real differential advantage that these folks had when looking at themselves versus the large Wall Street brokerage firms was that they could boast that they were willing to take on fiduciary responsibility in the clientsí investments. Now the FPA has actually just forced $300 billion in assets from the commission replacement accounts into the advisory model."

Others, however, take a different view. State Farm recently informed 270 of its insurance agents that the firm would no longer support their use of the CFP designation, because of the new fiduciary duty for financial planning services that the CFP designation now implies. (As defined by the CFP Standards, "financial planning" can cover the sale of insurance policies when those sales are made in the context of a financial planning engagement.)

Meanwhile, the debate over an IA SRO continues. Last week, in an interview with a Reuters reporter, Commissioner Kathleen Casey indicated that she might support an IA SRO. "In light of the size and growth of investment advisory business and the overlap in many cases there, an SRO could serve as an important enhancement to the SECís ability to police the markets," she was quoted by Reuters as saying. "We still want to provide flexibility to have broker-dealers and investment advisers engaging in different services that they provide to investors," she added.