Kirsch says he anticipates a universal standard would mean more regulation, enforcement and litigation for broker-dealers, particularly involving disclosures.

The proposed harmonized standard is also a critical issue for registered investment advisors (RIAs) who abide by the fiduciary standard. "We don't want to see the definition of fiduciary watered down just so it can be applied to broker-dealers," says William Baldwin, president of Pillar Financial Services in Waltham, Mass., and chairman of the National Association of Personal Financial Advisors (NAPFA).

Suitability Of Fiduciary
The call for a fiduciary standard that is the same for all advisors sets the stage for a contentious debate. Then again, that's the nature of this inherently muddled issue.

Broker-dealers are mainly regulated under the Securities Exchange Act of 1934, and investment advisors under the Investment Advisers Act of 1940. The fiduciary standard of care concept, which requires advisors to act in their clients' best interests, was embedded in the Advisers Act and subsequently upheld in the 1963 Supreme Court decision, SEC v. Capital Gains Research Bureau.

Broker-dealers weren't included in the Advisors Act because investment advice is "solely incidental" to their business and their pay is based on product commissions, not advice-related fees. Thus, they're held to the suitability standard.

The RAND Report, which was conducted for the SEC and released in early 2008, noted the boundaries between the two camps have increasingly blurred in recent years and that retail investors don't understand the differences between broker-dealers and RIAs or how they're regulated.

In a speech in June, SEC Chairman Mary Schapiro commented on the need to harmonize the regulatory structure for broker-dealers and RIAs. "If both broker-dealers and investment advisers are providing virtually identical services to retail investors," she said, "then the regulatory regimes that govern those activities should be virtually identical as well."

Other financial services officials-including Rick Ketchum, FINRA's chief executive, and Tim Ryan, president of the Securities Industry and Financial Markets Association (SIFMA)-also support a harmonized standard.

"To me, the word 'harmonization' is unfortunate because I think people who use it are imposing the broker-dealer rulebook on investment advisors, not the other way around," says David Tittsworth, executive director of the Investment Adviser Association (IAA).

For Tittsworth and like-minded allies, there's no need to tinker with the existing fiduciary standard. Because the standard is embedded-not defined-in the Advisors Act, they say it remains a flexible, principles-based concept for SEC enforcement purposes.

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