Among other things, the letter calls SIFMA's idea of a uniform fiduciary standard a 'broker sales standard'

April 13, 2012 — 3:44 AM UTC by Hilary Johnson


At this time last year, hopes were high in the investment adviser community that the Securities and Exchange Commission would follow up its Section 913 Study with a proposed rule on a uniform fiduciary standard.

But with an eerie silence on the commission’s part over the months, several groups are now reminding the SEC that the investment community is still waiting for a decision. See: One-Man Think Tank: Four red flags in the SEC’s fiduciary report.

On Monday, the Institute for the Fiduciary Standard wrote to the SEC rejecting SIFMA’s stand on fiduciary status as expressed in a July letter by the trade group for brokers. The institute’s letter echoes a similar missive sent to the SEC March 28, from RIA industry organizations and consumer advocacy groups.

Way, way short

“SIFMA is proposing a broker sales standard, not a fiduciary standard,” institute president Knut Rostad said in a press release accompanying Monday’s letter to the SEC. “It falls way, way short of the fiduciary obligation established under the [Investment] Advisers Act [of 1940]. As such, SlFMA is trying to overlay Wall Street’s product sales model on to the Advisers Act fiduciary advice model.” See: 10 top groups define 'fiduciary’.

The March 28 letter, signed by The Certified Financial Planner Board of Standards Inc., the Financial Planning Association, National Association of Personal Financial Advisors, Investment Adviser Association, AARP, Fund Democracy and the Consumer Federation of America, read: “While the commission must be mindful of the impact upon the industry as it implements the fiduciary standard for brokers, it must also avoid an over-response to expressions of broker-dealer concerns that reflect either a misunderstanding of the standard or an unwarranted effort to limit its scope. The result of accommodating such unfounded concerns would undermine entirely the congressional initiative to provide necessary investor protections.”

Both letters pick apart SIFMA’s July letter to the SEC almost line by line, pointing out where, in the groups’ view, SIFMA parsed the law to support its suggestion that a new fiduciary standard is needed, rather than an extension and clarification of the Advisers Act.

A spokeswoman for the SEC, Judith Burns, did not provide a response directly to the March 28 or April 9 letters, but pointed to Chairman Mary Schapiro’s last testimony on the subject from December 2011, in which she told Congress, “The staff is currently considering the contours of rule-making following on the study, including the costs and benefits of options for rule-making. The staff also is continuing to meet with academics, and industry and investor representatives, who have an interest in or insights into the results and recommendations of the study. In addition, the commission’s economists are considering available data that would help inform any potential rule recommendation.”

Schapiro also confirmed continuing work on the topic in a letter to Rep. Scott Garrett (R-N.J.), chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, who wrote to her inquiring about cost-benefit analysis.

Bridging gaps

David Tittsworth: We are striving to rise above the rhetoric by identifying specific areas of potential agreement.
David Tittsworth: We are striving to
rise above the rhetoric by identifying
specific areas of potential agreement.

The signatories of the March 28 letter say it was written to suggest a way forward by delineating points of agreement and disagreement.

“Our letter is a good faith effort to try to bridge the gaps where possible,” says David Tittsworth, executive director of the Investment Adviser Association. “By following the outline of SIFMA’s letter, we are striving to rise above the rhetoric by identifying specific areas of potential agreement — even while explaining why we disagree with certain aspects of SIFMA’s positions. We hope this will help the SEC in moving forward with the Section 913 rule-making.” See: The 10 most influential figures in the RIA business going into 2012.

Barbara Roper, director of investor protection for the Consumer Federation of America, agrees. “This issue doesn’t have to be dead. There’s a way forward that could be based on some general principles of agreement. We’re saying, 'This is where we see potential for agreement, and these are the areas where disagreements would have to be worked out.’”

Nothing better than something?

The letters come more than a year after the SEC staff stated in its Dodd-Frank-mandated Section 913 study that there should be a uniform fiduciary standard, and about eight months after SIFMA’s letter to the SEC. It took time, advocates say, to carefully examine the SIFMA approach, and get all signatories to approve the letter.

But with the SEC grappling with its other mandated work related to Dodd-Frank, as well as pressure to prove that rule-making meets rigorous cost-benefit analysis, the investors’ best interest are getting shunted to the side, according to many in the advisory community. Additionally, there’s concern that if the SEC adheres too closely to the SIFMA approach, there will be virtually no fiduciary standard.

Harold Evensky: I'd rather them delay and come out with something substantive, rather than a watered-down standard.
Harold Evensky: I’d rather them delay
and come out with something substantive,
rather than a watered-down standard.

The problem is that SIFMA is backing what some suggest is a dressed-up version of the suitability standard that now applies to broker-dealers, as Rostad and the Institute for the Fiduciary Standard wrote in their letter. See: The suitability standard, defined.

“SIFMA’s uniform standard is not an “investor best interest” standard; it should be branded what it is: a 'Broker Sales’ Standard,” the letter read.

Rostad said in an interview that he believes that no SEC decision at all would be preferable to one that follows SIFMA’s recommendations.

“I have mixed feelings about the commission moving forward that are tied to how much of the views of SIFMA are they going to adopt,” he says. “If they essentially adopt SIFMA’s views, investors would be far better off if the commission did not go forward. If SIFMA’s views are essentially embodied by the commission, there will be no fiduciary standard left.”

Harold Evensky, president of Evensky & Katz and a member of the Steering Committee of The Institute for the Fiduciary Standard, agrees.

“I’d rather them delay and come out with something substantive, rather than a watered-down standard. It might take decades to turn that around.” See: The Fiduciary Debate: Getting past the vested interests.

New SRO?

When asked for comment on the groups’ letter, Ira Hammerman, SIFMA’s senior managing director and general counsel, reiterated in an e-mail the stance articulated in his organization’s July letter to the SEC.

“We support a uniform fiduciary standard of conduct that increases protection for individual retail investors receiving personalized investment advice while preserving investor choice. With that, we call for a uniform standard of oversight and enforcement through the creation of a new [self-regulatory organization] for RIAs, which we view as a natural and necessary component of a new uniform fiduciary standard. We believe our framework offers the optimal path forward for regulators to establish a new standard in line with what Congress wrote in the statute.”

Ira Hammerman:  We believe our framework offers the optimal path.
Ira Hammerman: We believe our
framework offers the optimal path.

Time running out

Industry observers say that unless the SEC acts quickly, a no-decision outcome is likely given the upcoming presidential election. In addition, the JOBS Act may divert rule-making resources in the near term.

“We hope it will help move the issue, and help the SEC get a proposal out there,” said Mercer Bullard, president and founder of Fund Democracy.

Asked if he felt frustrated by the SEC’s inaction, Dan Moisand, principal of Moisand Fitzgerald Tamayo and a former chairman of the Financial Planning Association, responded, “I have been frustrated by the SEC over the course of my 20-plus-year career.
They’ve allowed the line between adviser and broker to become so blurred, and it’s gotten worse and worse. They have the opportunity to stop it, or screw it up worse than they already have.”

Share your thoughts and opinions with the author or other readers.


Stephen Winks said:

April 13, 2012 — 7:37 PM UTC

Steve Thomas,

Your insight as a regulator is very instructive. From the perspective of a regulator, why is this Congressional mandate holding brokers to the fiduciary standard so difficult for the SEC? It is an easy call.

It is only complex if the SEC is trying to thread the needle in deference to the brokerage industry, not the consumer they are charged to protect. It is incredible that the brokerage industry would actually want to rewrite 800 years of trust law, very unfavorably impacting wide ranging institutions which have been in place since the beginning of time because it can not adapt to modernity which leverages the broker through advanced processes, technology and supporting resources.

What puzzles me is why is this even a close call for the SEC.



Steve Thomas said:

April 13, 2012 — 6:12 PM UTC

In my 8 years as a state regulator and now as a compliance consultant I have never received a NO answer to this question, “Don’t you always act in you client’s best interest?” The BD side of the business wants their cake and to eat it to but stating they always act in the client’s best interest – and letting their clients think that is the case – but not having their feet held to the fire when it comes to regulation that requires a true fiduciary standard. It’s time to fish or cut bait and the knife is in the SEC’s hand…ST


Stephen Winks said:

April 13, 2012 — 5:15 PM UTC

Given brokers are not accountable for their recommendations and have no ongoing fiduciary responsibility to act in the client’s best interest, the public policy objective of Dodd-Frank to restore the trust and confidence of the investing public is clear to all, including Congress and the SEC.

Why is it that the brokerage industry has to grant permission to the SEC to execute its Congressionally mandated duties ? Are brokers going to act in the best interest of the consumer or are they not.

The missing point in the discussion is that the industry’s defense from incurring fiduciary liability by simply maintaining brokers do not provide advice is terribly expensive running 15% to 20% of gross revenues which rivals in size the industry’s margins. If the industry would simply redeploy the resources it presently expends on assuring its brokers do not render advice, to actually supporting fiduciary standing so advice is safe scalable, easy to execute and manage as a business, the trust and confidence of the investing public would immediately be restored.

The economics of advice gives the industry three times the earnings multiple to commission sales, streamlines cost structure, facilitates an unprecidented level of investment and administrative counsel at a lower cost than a packaged retail product all of which is beneficial especially the broker who wants to act in the client’s best interest. The only question that remains is why wouldn’t the industry support the best interests of the investing public especially when it is a Congressional imperative.

Doesn’t it seem odd, that the best interest of the investing public is even in question here ? This should not have anything to do with the best interest of the brokerage industry. It is all about the trust and confidence of the investing public, the wisdom of public policy, not the best interest of the brokerage industry.


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