The recent momentum behind financial regulatory reform has greatly advanced the discussion about the role of fiduciaries and brought the adoption of a single fiduciary standard for investment and financial advisors closer to reality. Indeed, Congress is actively considering legislation drafted by the Treasury, and regulators are preparing to respond to changes in the statutory landscape.
Yet despite this progress, questions are still being debated about what a fiduciary is as the industry and lawmakers seek clarification about the definition, ask questions about who will oversee regulations on fiduciaries and ask who the standard applies to.
For many, it's a no-brainer that the fiduciary standard should apply to all investment advice providers. Yet when the current administration's plan called for broker-dealers to raise their own advice-giving to this standard, the industry balked and began asking questions about what the definition really was. This has prompted investment and financial advisors to worry about which policymakers will eventually control the standard and how they will define and apply fiduciary concepts.
Defining Fiduciary
Those now questioning the meaning of what a fiduciary is point out that it has been defined differently by federal and state laws. However, their arguments ignore key points about the framework of fiduciary obligations. To act as a fiduciary is to serve in a relationship of trust that carries with it duties of loyalty and due care. It goes beyond basic concepts of honesty, good faith and fair dealing, and it prohibits any professional from taking unfair advantage of a client's trust. For investment fiduciary relationships, in particular, it requires the professional to provide disinterested advice to clients.
Differences in the laws can be traced to distinctions in fiduciary functions-in other words, it is not the definition of fiduciary that varies, but the role the fiduciary plays. These different roles stem from different levels of trust in the client relationships, and that's what has led to differences in requirements and prohibitions in the law.
For example, the Employee Retirement Income Security Act (ERISA) sets requirements and prohibitions for fiduciaries working on qualified retirement plans. The Uniform Prudent Investor Act (UPIA), meanwhile, concerns fiduciaries serving private trusts. And the Investment Advisers Act of 1940 governs investment fiduciaries. However, no matter what the context of the relationship or the applicable functional requirements, trust, loyalty and due care have always remained at the foundation.
To their credit, SEC Chairman Mary Schapiro, Commissioner Elisse Walter and Commissioner Luis Aguilar, who collectively represent the Democratic majority at the SEC, have each acknowledged the fundamental duties associated with being a fiduciary. Aguilar in particular has noted that there is only one standard, and that it obliges the fiduciary to put a client's interests above his or her own. Schapiro and Walter, however, have drawn more attention for their statements because of their roles as former FINRA executives. Walter has not articulated a full definition of fiduciary, but says she believes all financial professionals should act in the best interests of investors. Schapiro, though, has specifically acknowledged a fiduciary's duty to go beyond honesty and good faith by avoiding conflicts of interest that impair the fiduciary's capacity to act for the benefit of the client.
If advisors have shown any optimism about these statements, however, it has been tempered by the comments of FINRA CEO Richard Ketchum. While Ketchum has said he believes a "properly designed" fiduciary standard should apply to all advice providers, most of his public comments have tended to support the less stringent suitability standard, which some believe is an uninformed view and a less-than-sincere commitment to fiduciary principles. His statements about designing a fiduciary standard echo the views of brokerage industry members who have called for either a "universal" standard of care or a newly developed federal fiduciary standard for both broker-dealers and investment advisors. Because FINRA serves in a key oversight role for broker-dealers and says it wants to supervise investment advisors as well, many view Ketchum's position as a serious threat to the integrity of the fiduciary standard.
Fiduciary Oversight
Despite Ketchum's bold claims that FINRA is ready to fulfill the investment advisor oversight role, and even though Walter and her colleague, Commissioner Kathleen Casey, have supported oversight of fiduciaries by a self-regulatory organization (SRO), it appears that the SEC will remain the primary federal regulator of investment advisors, at least for now. When Schapiro sent a legislative "wish list" of changes she wanted to make to the federal securities laws this summer, it conspicuously left out any mention of an SRO for investment advisors, and House Financial Services Committee Chairman Barney Frank announced in August his opposition to creating one.
Questions about oversight will continue to be considered, though, as regulatory reform efforts push forward and a scheme for both broker-dealers and investment advisors is further developed. Both Schapiro and Aguilar have publicly endorsed the idea of self-funding for the SEC to increase its resources for technology, enforcement and oversight, but it's not clear that Congress would support this model. That being said, if the SEC's resources prove insufficient for the agency to oversee and enforce the fiduciary standard and if self-funding is rejected as a viable alternative, the SRO model could gain more interest and support.