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News April 2, 2012 Issue

Industry Groups Call on SEC to Adopt Advisers Act Fiduciary Standard for Brokers

Itís time to break the regulatory stalemate and make the uniform fiduciary standard that will protect retail investors a reality.

That was the message sent to the SEC last week by seven of the financial and consumer protection industrysí staunchest fiduciary advocates.

On March 28, the Investment Adviser Association (IAA), Consumer Federation of America (CFA), Fund Democracy, AARP, CFP Board of Standards, Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (the "group") submitted a joint letter to SEC Chairman Mary Schapiro suggesting a way for the SEC to move forward.

"We write as organizations that strongly support extension of the Investment Advisers Act of 1940 fiduciary duty to all broker-dealers when they offer personalized investment advice about securities to retail customers," said the group. The group supports the general approach outlined in the SECís study pursuant to Section 913 of the Dodd-Frank Act (DFA) that would see the adoption of parallel rules adopted for broker-dealers and advisers.

The broker-dealer industryís fears are "clearly unfounded," they said, and a uniform fiduciary standard will not fundamentally alter their business model.

The group noted that some in the broker-dealer industry have predicted dire and "catastrophic" consequences if a fiduciary duty is imposed. Brokers claim they would be forced to abandon commission-based compensation, proprietary sales, or transaction-based compensation.

Those concerns "ignore both the clear direction from Congress with regard to how the fiduciary duty would be applied and extensive evidence that the Advisers Act fiduciary duty is sufficiently flexible to apply to a variety of business models."

Such concerns reflect either misunderstanding of the fiduciary standard, or constitute an unwarranted effort to limit its scope, said the group.

As long as the SEC stays true to its vision as outlined in the Section 913 Study, it can implement a standard that retains attributes of the broker-dealer business model that are important to that industry while fulfilling the Congressional mandate to enhance investor protections, they said.

Start with the Securities Industry and Financial Marketing Associationís (SIFMA) proposed framework for a uniform fiduciary duty, said the group. The SIFMA letter does a good job of highlighting the key issues, they observed, even though on some points, SIFMAís view varies widely from the groupís view. Itís a good roadmap for demonstrating where all views are aligned and where views diverge.


The group letter then proceeds to take SIFMAís rationales apart, one point at a time.

For example, the group agreed with SIFMA that a "new articulation" of the fiduciary standard is needed Ė if by "new articulation," they mean simply the new rule that has been mandated for brokers providing advice to retail investors. Thereís no need for a new standard that is "separate and distinct" from the Advisers Act standard, they said. The goal in writing new rules should be to extend the existing fiduciary duty to brokers while clarifying its applicability in the context of broker-dealer conduct, said the group.

"This letter provides a framework for the SEC to structure a fiduciary standard that truly balances the needs of retail customers with the business practices of investment professionals," said FPA executive director Marvin Tuttle.

In summary, the group acknowledged that while they continue to have "significant" differences with SIFMA regarding the regulatory details of imposing of a uniform fiduciary standard, all sides believe a structure can be developed that ensures investor protections and access to services that investors want and need to achieve their investment goals.

At least now, the SEC has clearly articulated views from both sides of the fiduciary fence on how to build that structure.