The Institute for the Fiduciary Standard is warning that the Securities and Exchange Commission’s promise of fiduciary rulemaking could be a dangerous proposition for consumers.
In its first-quarter report on the status of fiduciary standards for the brokerage industry, the Institute said SEC fiduciary rule making would cause troubles for consumers if it results in the SEC watering down the existing fiduciary standard instead of improving investor protections. Currently only investment advisors and not brokers are governed by the regulation requiring advisors to put their clients’ interests before their own.
If the Securities and Exchange Commission doesn’t come up with a rule that goes beyond just the disclosure of conflicts of interest, state regulators and consumers may need to take front and center stage in the debate, the Institute said in its report.
“Bottom line, SEC rulemaking will come with big risks,” the Institute said. “The chief risk is that enhanced disclosures are branded as fiduciary duties. Investment advice is a confidential and intimate relationship of trust and confidence. In this case, investors would be better served with no new rulemaking, but by a faithful enforcement of the Advisers Act of 1940. The Institute is pressing our view with the Commission. Our next meetings are on April 5th,” the group said.
Never a group to steer away from controversy, the nonprofit institute faults federal regulators and the industry for failing to develop standards for more than a decade.
To give further voice to that sentiment, the Institute is producing the first in a series of video interviews with investors who have been defrauded by brokers, Knut Rostad, the president of the nonprofit Institute, told Financial Advisor. Rostad said the investor interviews will be used to educate investors and lobby regulators and industry leaders to consider more aggressive investor protection rules.
“We have relearned a very important lesson, notwithstanding earlier optimism: The brokerage industry has no interest in meeting true fiduciary duties in a serious way,” Rostad said.
“I have a hard time being optimistic given all SEC Chairman Jay Clayton’s talk about the importance of disclosure,” Rostad said. “I don’t recall anywhere him talking about the delivery of investment advice in a confidential relationship of trust and confidence. These are certain words that I never, ever hear coming from his statements and that’s not a good sign to me.”
In addition to including disclosure, Clayton has said he wants the SEC’s best interest proposal to address the titles that advisors call themselves, which can be confusing to anyone not versed in the very different legal requirements that govern different professionals. Currently, brokers who are subject to suitability rules can pose as “trusted advisors,” when in fact they are only governed by a suitability standard that requires them only to advise suitable investments -- not the very best available to the investors. “If the language was written well, this could be effective, but that’s a big if, so I’m not betting the farm,” Rostad said.
“What we need to see in the SEC’s standards is a discussion about what it means to mitigate or neutralize broker conflicts, but I have heard no mention of that anywhere in published reports and after meeting with three of the SEC’s four commissioners and Chairman Clayton's counsel,” Rostad said.