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News March 23, 2015 Issue

White Endorses Uniform Fiduciary Standard and Third-Party Exams

SEC chair Mary Jo White on March 17 backed a uniform fiduciary standard for investment advisers and broker-dealers, and said that third-party examiners would be the best existing option to supplement the SEC’s own examination efforts in ensuring adviser compliance with a new standard.

"My own personal view … is that the SEC should act, pursuant to Section 913 of Dodd Frank, to implement a uniform fiduciary duty for broker-dealers and investment advisers, where the standard is to act in the best interests of the investors without regard to the financial or other interests of the broker-dealers or the investment advisers," she said during a question-and-answer session at a SIFMA conference in Phoenix.

Advisers concerned that such a standard might weaken the existing adviser fiduciary standard can take heart from White’s qualifier that a uniform standard should be a "codified, principles-based standard, rooted in the … current fiduciary standard of investment advisers and should be no lower than that."

Recognizing that creating and then implementing a uniform standard would have "complexities and challenges," she said she would be "engaging in in-depth conversations with my fellow commissioners about really all aspects of this, as the staff proceeds to develop the recommendations both for the uniform fiduciary duty and the third-party compliance exam programs." She did not mention any timetable for taking action.

Clear guidance from the SEC will be needed as to what current practices of both advisers and broker-dealers can continue, what practices cannot continue and which need to be modified, White said. "Getting the balance right is absolutely essential, because at the end of the day, if what we succeed at doing is, in effect, depriving investors of reliable, reasonably priced advice, obviously we will have failed at that effort," she said.

Uniform fiduciary standard: Industry reaction


Investment Adviser Association, in a response to White’s remarks, said that it "has long advocated that all financial professionals who provide investment advice about securities to clients, including advice about retirement accounts, should act as fiduciaries – that is, they are subject to a legal obligation to act in the best interests of their clients and place their clients’ interests before their own."

But it also noted that the association "has urged the SEC to preserve the existing overarching fiduciary principles in the Investment Advisers Act of 1940 in any rulemaking on a uniform fiduciary duty. We would oppose any effort that would ‘water down’ the existing fiduciary standard and appreciate chair White’s recognition of the strength of the principles-based Advisers Act fiduciary duty."

"The issue always has been, ‘Can you come to a consensus?’" said

Willkie Farr partner and former SEC Division of Investment Management director Barry Barbash.

Barbash believes a uniform fiduciary standard makes sense. "The notion of a uniform fiduciary standard for professionals who provide essentially the same service is the right idea," he said. "There should be a level playing field of regulations." The danger of having differing regulations for professionals providing similar services is that "some individuals will play a game of regulatory arbitrage seeking to provide services subject to the least amount of regulation."

"It’s going to be a real challenge for the SEC to draft a rule that accomplishes all that White has suggested she wants it to, and even harder for her to get her fellow commissioners on board with it," said

Stroock partner and former deputy director of the SEC Division of Investment Management Robert Plaze. "Many of the industry groups supporting the concept of a uniform fiduciary duty are going to have divergent views of what that duty should be. To the extent White will need to compromise, the rule may not live up to the promise that it will be the equivalent of the fiduciary duty under the Advisers Act. I suspect that this is not the end of the battle."

Mayer Brown

partner Stephanie Monaco observed that a uniform fiduciary standard "has an allure as a concept," but "the devil is in the details." For instance, with allocations of investment opportunities, advisers are required to spread such opportunities in a fair and equitable manner among their clients for which the investment is appropriate. "What are broker-dealers to do under a uniform fiduciary standard, contact all of their customers when a good opportunity comes up?"

Third-party exams

White’s reason for backing third-party examinations would appear to be the inadequate resources currently provided the SEC, which has hampered the agency’s ability to hire enough examiners. A program of third-party compliance exams for investment advisers, while "not optimal in many ways," would be the best alternative, she said.

Such third-party examiners would not replace the SEC’s own examiners from its Office of Compliance Inspections and Examinations, she said, but would serve as a "supplement" to the exams OCIE provides. When asked whether the use of third-party examiners would be only for an interim period, White said the details remain to be worked out.

White did not suggest which organization might conduct the third-party exams. There has long been concern among investment advisers that the organization would be

FINRA, given its extensive experience examining broker-dealers. The concern among advisers is that, despite FINRA’s experience with exams, it is not qualified to examine advisers (ACA Insight, 5/19/14).

The IAA said that while it is considering ways to enhance the SEC’s oversight of the advisory profession, including possible roles for third parties, it is "concerned, however, that a third-party compliance program, depending on its parameters, would have a number of potential disadvantages compared with SEC examinations. Some of the many issues to consider include the standards, scope and frequency of any third-party reviews; the qualification process and oversight for third parties; and the cost to advisers."

SEC Commissioner

Daniel Gallagher, in a May 2014 speech, raised the possibility of existing broker-dealer self-regulatory organizations conducting examinations of dually registered investment advisers and broker-dealers. As for the organization that would conduct the exams, while Gallagher did not mention FINRA by name, the fact that it is the most prominent broker-dealer SRO would make it the most likely candidate for such adviser examinations.