A close analysis of broker-dealer lobbying group SIFMA's new "best interests" standard reveals highly disturbing aspects of the proposal that would, in essence, negate important consumer protections.
SIFMA recently unveiled a proposed best interests of the customer standard for adoption as amendments to FINRAs rules. The proposed new standard would take the place of the contemplated fiduciary standards that have been recently proposed by the Labor Department and that remain under consideration by the SEC (as authorized by the Dodd-Frank Act).
But SIFMA's proposal isn't enough to protect investors.
The term acting in the clients best interests has long been used in judicial opinions as the preferred means of describing the fiduciary duty of loyalty. And consumers possess a simpler understanding of the term that acting in the best interests of the customer or client means acting on their behalf, as their representative.
Yet, SIFMAs best interest proposal does not mandate applying the full range of fiduciary duties. Nor does it transform Wall Street from sell-side purveyors of products to buy-side trusted advisors. Hence, the use of the term best interests to describe SIFMAs proposed standard of conduct is potentially misleading.
While SIFMAs proposed standard advocates disclosures, there is no requirement, as exists under fiduciary law, to reveal all material facts to the client. While disclosure of investment-related fees and costs is mandated, the rule does not specify (as is found in the more powerful Best Interests Contract Exemption proposed under the DoL rule) an understandable format with specific fees and costs fully disclosed.
Moreover, while consent to conflicts of interest is required under SIFMAs proposal, there is no requirement (as exists under fiduciary law) that the clients consent be informed. It is fundamental to fiduciary law that the trusted advisor ensures the client is not merely informed of any conflicts of interest, but also achieves a solid understanding of the conflicts and their potential ramifications before granting informed consent. As many a court has concluded when applying fiduciary law, no client would knowingly consent to be harmed.
Nor is there a requirement, as exists under fiduciary law, that the proposed transaction, even with the clients informed consent, remain substantively fair to the client. Under fiduciary law, core fiduciary duties (including loyalty) cannot be waived, as would be permitted under SIFMAs proposal, which allows clients to waive conflicts of interest, even if such a waiver would result in harm to the client.
THE ADVICE COMPONENT
Through its proposal, SIFMA seeks to select pieces of fiduciary obligations, rather than the entire set of such obligations. In doing so, it seeks to permit its broker-dealer member firms and their registered representatives to continue to represent themselves as trusted advisors but without the strict fiduciary duties that attach to relationships of trust and confidence under centuries of fiduciary law.
Moreover, SIFMA proposes to abandon centuries of judicial precedent conveying understanding of the fiduciary principle. Instead, SIFMA proposes a new, vague, rules-based standard that could be easily circumvented. Moreover, the full parameters of the rule would largely be defined in FINRAs widely criticized system of arbitration.
In essence, SIFMA seeks to have customers trust product sales representatives, by touting a new weaker best interests standard such sales agents would adhere to. But such trust would be undeserved.
Many a jurist has observed the writ, known since ancient times, that man cannot serve two masters. Rather than have the registered representatives of broker-dealer firms truly act as trusted advisor to the clients, SIFMA seeks instead to permit the same sales tactics used today. In the process, consumer harm will be widespread.
WHOSE "BEST INTERESTS"?
One can only conclude that SIFMAs new proposed standard is but a desperate attempt to forestall the application of true fiduciary standards to the delivery of personalized investment advice. As such, it is clear that the standard SIFMA proposes is in the best interests not of consumers, but rather of Wall Street. Moreover, the standard does not meet the Dodd-Frank Acts requirement that should a fiduciary standard be imposed by the SEC upon broker-dealers providing personalized investment advice, it must be as strong as the fiduciary obligations found under the Advisors Act.
SIFMA wants to have its cake and eat it to. It wants registered representatives to be able to hold themselves out as trusted advisors, but have their primary loyalty flow back to the broker-dealer firm and to product manufacturers. But this is not what Main Street desires. Rather, Americans desire trusted advice, from those who truly act in the best interests of consumers, not from pretenders.
Financial advisors and investment advisors, you must make a choice. Do you desire to sell products, or do you desire to provide advice? Attempts to obfuscate, by straddling the middle of these two realms, are doomed to failure.
Our regulators should act swiftly to reject any further consideration of SIFMAs proposal for a weak, rules-based, pro-Wall-Street standard of conduct. Instead, the DoL and SEC should proceed with their efforts to adopt the fiduciary principle for all those who provide financial and investment advice to our fellow citizens.
Ron A. Rhoades, a lawyer and Certified Financial Planner, is program director of Western Kentucky Universitys B.S. Finance/Financial Planning Program.
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