New SEC staff guidance makes it nearly impossible for registered investment advisors to call themselves fiduciaries in customer relationship summaries [CRS], according to compliance specialists at an Institute for the Fiduciary Standard press conference yesterday.

RIAs owe clients an engagement-based fiduciary duty to put client needs and interests above their own at all times. So you might expect that advisor firms would be able to say that in the CRS summaries—the centerpiece of the SEC’s retail advice rule Regulation Best Interest—that were pitched by the agency as an education tool for investors to use to compare the different costs, conflicts and legal duties between advisors, dually registered advisors and brokers.

But the new guidance put out by SEC staff on March 31 makes it “it implausible and nearly impossible” for advisors to describe themselves as fiduciaries, said institute President Knut Rostad.

Speakers cited the following section of the SEC guidance:

“[I]n the staff’s view, embellishing factual statements about the capacity or services of an investment professional or firm with phrases such as ‘an investment adviser who is held to the fiduciary standard’ is likely to be inappropriate. Similarly, the staff cautions against describing the fiduciary duty as a 'higher standard' or the 'highest standard.' In addition, it is likely misleading and non-responsive for an investment adviser to represent that the fiduciary duty alone mitigates or eliminates conflicts of interest.”

SEC staff said that firms may use the word fiduciary or fiduciary duty “only to the extent permitted by the Form CRS Instructions and the applicable item.”

But that doesn’t give RIA’s any comfort, compliance experts said, since most were already told by their compliance professionals not to use the word "fiduciary" because they believed it would be a red flag.

Only six of 30 RIA firms with assets between $1 billion and $3 billion used the word "fiduciary" in their 2021 summaries and only two of the six described what it meant, according to a survey by the institute.

“We heard [investment advisors] say explicitly they were advised by their compliance consultants to not mention fiduciary status,” Rostad said.

One large RIA told the institute that on an “SEC outreach call” a junior SEC staff person told RIAs that citing fiduciary status is not allowed, he added.

Jeff Lang, an attorney and shareholder with Stark and Stark law firm, told conference attendees that the latest SEC guidance will continue having a chilling effect on advisors “who don’t want to be part of a sweep, if the information is not considered acceptable. No one wants to be that test case.”

What the SEC needs to do is clarify, with examples, when and how fiduciaries can use the word, Lang said. “From my legal standpoint, there are many state-registered and federally registered investment advisors who by law are actually held to a fiduciary standard. Wouldn’t it be great for them to be able to say that under the legal obligations section?”

The concern is that the SEC “is trying to level the playing field, not for true fiduciaries, but for those who are conflicted, such as securities and product sales people,” Peter Mafteiu, principal of Sound Compliance Corp., told Financial Advisor magazine. 

“For the SEC to say that Reg BI is a universal best-interest standard is just inaccurate. Dually registered advisors are only fiduciaries at the time they make a recommendation,” said Mafteiu, who is helping RIA firms use the word fiduciary in their Form CRS.

Rostad, who wrote SEC Chairman Gary Gensler in January asking for clarification regarding use of the term fiduciary in summaries, said he is actively lobbying both Gensler and SEC commissioners to overturn the staff guidance.

The Investment Adviser Association is also “continuing conversations” with the SEC in a bid to get greater clarity around RIA’s ability to describe themselves a fiduciaries in their relationship summaries, IAA President Karen Barr and General Counsel Gail Bernstein said in an interview.

“Where we’re concerned most is that even though the SEC says you can use the word 'fiduciary,' the rest of the language in the [guidance] indicates that it could be an embellishment. And we very strongly believe that fiduciary is not an embellishment. It’s a factual statement. RIAS are fiduciaries. It’s correct and accurate statement of their duties under the law,” Barr said.