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October 06, 2009 |
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Industry Groups Differ On Fiduciary Standard |
House Financial Services Committee members today heard two takes on the fiduciary standard––investment advisors who want it applied to broker-dealers and broker-dealers who want to apply a universal standard of care to all advisors, including investment advisors.
David Tittsworth, executive director of the Investment Adviser Association (IAA), told the committee his group strongly supports the Obama administration’s proposal to require broker-dealers who provide securities-related investment advice to have the same fiduciary obligations as registered investment advisors (RIAs).
That proposal is part of broad reform package contained in a 88-page white paper released in June, entitled "Financial Regulatory Reform: A New Foundation." In July, the Treasury Department released its proposed Investor Protection Act of 2009 aimed at implementing some of the ideas in the white paper.
At the same time, the Obama administration proposes harmonizing the legal standards that govern investment advisors registered with the SEC and broker-dealers who give investment recommendations to clients. The result could be a so-called universal standard of care, and the IAA isn’t on board with that.
Tittsworth said he’s concerned that the proposal could dilute or eliminate the fiduciary obligations that advisors owe all of their clients, whether individual or institutional. “One of the greatest strengths of a fiduciary standard is precisely its breadth––the standard has allowed the regulation of advisors to remain dynamic and relevant in changing business and market conditions,” said Tittsworth, whose trade group represents investment advisory firms.
Investment advisors are regulated under the Investment Advisers Act of 1940 and are governed by the Securities and Exchange Commission (SEC). They are held to the fiduciary standard of care, which requires them to act in their clients’ best interests.
Broker-dealers, who are regulated under the Securities Exchange Act of 1934 and are overseen by the Financial Industry Regulatory Authority (FINRA), are held to the suitability standard that requires them to make recommendations that fit a client’s risk tolerance, objectives and financial status.
The different approaches have governed the two sides for nearly 70 years. But as noted in the RAND Report in 2008, the boundaries between the two business models have increasingly blurred and that the public doesn’t understand the differences between broker-dealers and RIAs or how they’re regulated. Hence, the call to simplify things by adopting a single standard.
That’s fine by the the Financial Services Institute (FSI), a trade group representing independent broker-dealers. At today’s hearing, FSI urged House Financial Services Committee members to apply a new universal standard of care to both broker-dealers and investment advisors that doesn’t involve placing any sort of fiduciary standard on broker-dealers.
Dale Brown, FSI’s president and CEO, said applying the fiduciary standard to all financial advisors, regardless of their business model, will neither clear up the confusion nor lead to true reform. Instead, he supports a new universal standard of care that would close the regulatory gap between examination and supervision of RIAs and broker-dealers. He said that would benefit investors by contributing to the transparency, effectiveness and efficiency of the financial services regulatory structure.
“We emphasize that it is critical for middle class retail investors that the lack of an efficient and effective regulatory examination and enforcement program for registered investment advisors be addressed as part of these reform efforts,” Brown said. “Many of the financial advisors involved in recent high-profile fraud cases, such as Bernard Madoff, were subject to a ‘fiduciary standard,’ and yet were able to engage in fraudulent activities for years, due to the lack of effective, regular and vigorous oversight of their activities.”
Other groups that testified included FINRA, the North American Securities Administrators Association and officials representing private equity, venture capital and insurance industries, among others.
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Discussion
Should all advisors fall under one self-regulatory organization and could that happen on Mary Schapiro’s watch?
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