Represented by an influential lobbying group, broker-dealers are striking out against proposed regulations which would require them to adhere to an equal “fiduciary” standard with registered investment advisors in giving advice to retail investors.
In an Aug. 30 letter to the Securities and Exchange Commission, the New York and Washington D.C.-based Securities Industry and Financial Markets Association (SIFMA) warned that any uniform standard of care might actually harm rather than help investors. “Under a standard of care that the [SEC] adopts, a broker-dealer may determine that it could not provide personalized investment advice on an aggressive or sophisticated strategy to retail customers, even where the retail customer has sought advice and indicated his or her decision to employ an aggressive or sophisticated strategy, because it could be argued in hindsight that the strategy may not represent the best interests of such customer if more conservative options are available,” said SIFMA.
In addition, said SIFMA, broker-dealers might decide to offer some products and services to retail investors at a higher cost to meet the new regulatory requirements or stop offering commission-based transaction accounts completely. Trading on commissions is far less expensive than with fees for retail investors who trade sporadically.
SIFMA’s letter is one of over 2,000 received by the SEC, which gave the securities industry until Aug. 30 to comment on whether to change current rules. But as one of Wall Street’s largest lobbying groups, SIFMA’s opinions carry considerable clout with the regulator.
Currently, broker-dealers are required to give retail investors advice on “suitable investments” while most registered investment advisers have a fiduciary obligation to put clients’ interests firms. Section 913 of the new Dodd-Frank Wall Street Reform and Consumer Act, which became law on July 21, gave the SEC until the end of January to complete a study of differing standards of care which broker-dealers and investment advisers give their retail customers. The regulator then has the authority to impose a common “fiduciary” standard of care.The rule would apply to anyone who gives retail investors advice.
SIFMA says that it does support broker-dealers putting clients’ interests first and disclosing potential conflicts of interest. But its recommendations are still not in line with the fiduciary principles outlined in the Investment Advisers Act of 1940, say some legal experts.
In its letter to the SEC, SIFMA recommended that the SEC adopt a layered approach to disclosure. That means broker-dealers could start off with a general discussion of conflicts of interest and refer investors to a website with more detailed disclosure on particular products. SIFMA asked the SEC not to require current customers to consent in writing to initial conflict-of-interest disclosures because contacting millions of existing customers would be “unduly burdensome and would provide no additional benefit or protection.” In a worse case scenario, a broker-dealer or investment adviser would not be able to continue trading for the retail customer if it didn’t receive a signed disclosure document.
The trade group requested that the SEC delay any implementation date for the new standard because broker-dealers will need sufficient time to implement training programs and build new systems.
SIFMA’s stance is in sharp contrast to that of that of investment advisors and other financial planners who also say they want a “well-defined standard of care.” In its letter to the SEC, the Financial Planning Coalition, which consists of the Certified Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors, says that the SEC should adopt a blanket fiduciary standard. ”The Commission should not allow certain firms to provide personalized investment advice to retain customers at a lower standard simply to accommodate those firms’ business models.”