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News September 18, 2017 Issue

IAA Wants SEC to Keep Fiduciary Standard for Advisers, Create New Standard for Brokers

The Investment Advisers Association has staked out its position in the ongoing tussle over creating appropriate standards of care for advisory firms and broker-dealers. The SEC, it believes, should retain the existing Advisers Act’s fiduciary standard for investment advisers, while creating a new and separate "best interest" standard for broker-dealers that is just as stringent.

The association on September 6 disclosed this and additional recommendations to the agency made in its August 31 comment letter. SEC chairman Jay Clayton called for public comments on the issue this past June, as it prepares to get more involved with standards of care for advisers and broker-dealers.

In making its recommendation for two different standards – the existing fiduciary standard for advisers and a new best interest standard for broker-dealers – the IAA agreed with comments from some other associations, including those found in the Investment Company Institute comment letter and those found in the Securities Industry and Financial Markets Association comment letter, that there should be a separate best interest standard for broker-dealers. ICI, like the IAA, specifically called for the existing advisers’ fiduciary standard to be retained.

Any standard created for broker-dealers must be "as robust" as the existing fiduciary standard for advisers, the IAA said in its letter. "Broker-dealers should be held to similarly robust standards and be required to make similarly robust disclosures under any new standard of conduct." As an example, the association noted that, in order to address investor confusion about the nature of the services offered by their financial professionals, "we would expect that broker-dealers subject to the best interest standard would provide appropriate disclosures regarding the capacity, scope, duration of services, material conflicts of interest, and compensation arrangements related to those services."

The new best interest standard for broker-dealers should be created under the Securities Act of 1934 and apply to broker-dealers when making non-discretionary investment recommendations to retail customers, the IAA said. It added that the SEC should "affirm" that all persons providing discretionary investment advice to clients, regardless of the form of compensation, or who provide advice for a fee, remain subject to the Advisers Act’s fiduciary standard.

In the event that the agency is unable to adopt an equally stringent standard for broker-dealers under the Exchange Act, the IAA said, the SEC should prohibit firms or individuals not subject to the Advisers Act’s fiduciary standard "from holding themselves out in a manner that implies a fiduciary relationship."

"It’s a pragmatic approach that should work," said Proskauer partner and former SEC Division of Investment Management deputy director Robert Plaze of the IAA recommendations. "The Commission should do something on the broker-dealer front that recognizes the differences between advisers and broker-dealers. This comment letter is a workable approach and something that the Commission legally and politically could propose."

"The reality is that it is politically impossible for the SEC to lower the standards of advisers, and that brokers will fight like hell, as they have, against being subjected to fiduciary duties," said Stern Tannenbaum partner Aegis Frumento. "For one thing, most brokers would not be able to live up to that standard – they are salesmen by temperament and inclination, and salesmen don’t make reliable advisers. The firms they work for know it, which is why they don’t want to take on the impossible job of ensuring they comply with regulations they know cut against the very psychological make-up of the persons they are aimed at."


More than 100 comment letters have been received to date since Clayton issued his call for comments on June 1. He made the call shortly after taking office, and also shortly after Department of Labor secretary Alexander Acosta suggested that the SEC and the DOL work together on creating standards of care for broker-dealers.

The DOL adopted a final Fiduciary Rule for broker-dealers who make retirement investment recommendations, which became formally effective June 1. However, since the Trump administration took office, the Rule, and certain exemptions related to it, has been subject to repeated delays. Currently, even though the Rule is effective, the DOL is not enforcing compliance with many parts of it, or of the related exemptions, until January 1, 2018. Further, even that date is now doubtful for the exemptions, as the DOL recently proposed pushing back the compliance date until July 1, 2019 – and also suggested that it will be soliciting comments for different, streamlined exemptions (ACA Insight, 9/11/17).

As for the SEC, a number of the comment letters it received called for it creating a final rule for broker-dealers, and then having DOL fit whatever it creates within the DOL regulations. Clayton’s call for comments is seen as perhaps the first step in the agency moving in that direction.

Clayton called for comments on 17 different topics related to standards of conduct, including the need to address retail investor confusion, potential conflicts of interest, and market developments and technology.

The IAA’s comment letter

Following are the actual recommendations made by the IAA, along with supporting explanations the association provided.

  • Preserve the fiduciary duty standard under the Advisers Act, which encompasses the important principles of loyalty and care. "Because the Advisers Act standard has worked well for advisers and their clients for so long, we would strongly oppose any changes to it, including any attempt to ‘harmonize’ it with the broker-dealer’s suitability standard, which likely would dilute the Advisers Act standard by trying to find a ‘middle ground,’" the association said. It added that it would also oppose "harmonization" because "it would disharmonize [emphasis IAA] the application of the Advisers Act." Since the Advisers Act fiduciary standard protects retail and institutional clients equally, "the perverse result of changing the Advisers Act standard for retail clients would be to make the new standard weaker than the standard that would continue to apply to institutional clients."
  • Affirm that all persons who provide discretionary investment advice – regardless of the form of compensation – or provide advice for a fee, are subject to the fiduciary standard under the Advisers Act with respect to that advice. The association wants the SEC to let it be known that all persons who receive discretionary advice – regardless of the form of compensation they receive, including whether by asset management fee or by commission – are subject to the Advisers Act. "We have long agreed with the Commission’s 2007 proposed interpretation that discretionary investment advice cannot be deemed ‘solely incidental’ to brokerage services, and persons who provide such advice must be registered as investment advisers and be subject to the Advisers Act with respect to that advice." It also urged the agency to "codify its long-held view that when a broker-dealer charges customers a separate fee for investment advice, it is providing advisory services and is therefore subject to the Advisers Act.
  • Adopt a new principles-based best interest standard of conduct under the Exchange Act for broker-dealers when making non-discretionary investment recommendations that are tailored to core broker-dealer activities but is no less stringent than the Advisers Act fiduciary standard. "This new Exchange Act standard should codify the notion that investment recommendations constitute investment ‘advice,’" the IAA said. "To ensure that the interests of retail investors always come first, regardless of the different business models of investment advisers and broker-dealers, this new standard should be tailored to the core activities and business models of broker-dealers but be no less stringent than the Advisers Act fiduciary standard." The association said that it also wants such a new standard "to incorporate the principles of loyalty and care and require appropriate and meaningful disclosures, consistent with these concepts under the Advisers Act." It added that while the standard should be principles-based, it should include, at a minimum, certain specific requirements that would ensure adequate and appropriate implementation of the standard.
  • Prohibit firms or individuals from holding themselves out in a manner that implies a fiduciary relationship if they are not required to adhere to the principles [noted in the first three recommendations]. The SEC needs to carefully consider the "widespread confusion" over the way that financial professionals hold themselves out to the public," the IAA said. It noted a 2008 SEC study that found, among its conclusions, that "investors generally do not understand the key distinctions between broker-dealers and investment advisers, nor do they understand the varying legal duties of and standards imposed on broker-dealers and investment advisers." Financial professionals using terms such as "financial adviser" "imply a relationship of trust and confidence but in effect, disclaim fiduciary responsibility for such a relationship."

"Brokers who have the intelligence and integrity to be advisers should register as advisers and willingly take on the fiduciary responsibilities that go with it," said Frumento. "The rest should give up trying to fool us into thinking they care more about us than about their own incomes. They should stop using titles that trade on the professional aura of advisers. They should clearly inform their customers of their limited duties to them."