SIFMA proposes that advisors should continue to be subject to the fiduciary standard under the Advisers Act. Brokers would not be. Instead, the SEC would direct FINRA, the brokerage industry’s self-regulatory body, to engage in rulemaking under the Exchange Act. FINRA, with the SEC’s approval, would “consider establishing a best interest standard of conduct for BDs that builds upon their existing regulatory regime.” In other words, create a separate regulatory scheme for brokers, administered by brokers, that looks like a true fiduciary standard, but isn’t.
The details of SIFMA’s proposal are revealing. First, none of the principles or precedents developed under the Advisers Act fiduciary standard would apply to brokers. Rather, brokers would be subject to an enhanced suitability rule requiring them to act in a client’s best interest at the time a recommendation is made, but not on a continuing basis. The new standard would be “principles-based” so it would not come with all the messy, detailed requirements that were incorporated into the DOL’s new fiduciary rule. Brokers could charge commissions, principle trade and offer proprietary products—almost business as usual.
Only Two Things Can Happen
The brokerage industry recognizes the inevitability and even the desirability of some sort of fiduciary or best interest standard of conduct. The industry fought the DOL’s version of it for years and was successful in semi-gutting the rule by delaying its most odious provisions. But much of the rule is in place today. Momentum for a higher standard of conduct is building.
Against this background, the brokerage industry sees an opportunity. Rather than standing in opposition to the process, why not join in and play a role in shaping the final form of the standard? Accept the inevitable and work from within.
If the brokerage industry is successful in promoting its enhanced suitability standard as an alternative for a fiduciary standard, one of two things will happen and both are bad. Either we will end up with a two-tiered system that imposes a tougher standard on advisors than on brokers, or we will end up with a single, diluted best interest standard that applies to both.
SIFMA’s current proposal would result in a two-tier system. The two standards would be more similar than the current standards, so the public would be even more confused about the differences between brokers and advisors. RIAs would lose an important point of differentiation, while being forced to compete with brokers on an uneven playing field.
This two-tiered solution would also violate an important regulatory principle. Substantially similar behavior should be regulated in a consistent and uniform manner. Those who provide personalized investment advice to retail clients should be subject to the same standards of behavior. SIFMA’s Snook even said so back in 2009. Any other result would be unharmonious.
But beware of insisting on a level playing field and harmonization of the standards applicable to brokers and advisors. This could easily result in a single “best interest” standard that dilutes the current fiduciary standard. It could happen if the drive for uniformity and a level playing field takes precedence over the best interests of investors.
Brokers can’t live under a true fiduciary standard and continue the practices that are common to their business model today. But advisors could live under a lower standard that would permit brokers to be brokers. We could have uniformity if the bar was sufficiently lowered to allow brokers to charge commissions, principal trade and sell proprietary products. But the investing public would suffer by being deprived of the higher fiduciary standard.