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How a surprising array of advisor groups aims to catch the SEC's ear

A conference of experts from academia, industry will examine how the fiduciary standard could work in a brokerage business

Author Elizabeth MacBride September 13, 2010 at 4:42 AM
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The CFP Board of Standards is co-sponsoring a conference to bring top academics, industry thinkers in front of regulators. Kevin Keller, CEO, says advocacy groups can't afford to take a break now.

Stephen Winks

Stephen Winks

September 13, 2010 — 6:21 PM

Why make this all or nothing debate, requiring brokers to be held to the fiduciary standard of care, a negotiation? This is the precise outcome Wall Street would prefer.

Very dangerous as there is a high probability that the fiduciary standard of care, 800 years of common law and the consumers best interest will not prevail. Everyone will want to be acting in a fiduciary capacity via exceptions for the insurance industry, the brokerage industry, etc. which makes regulation impossible to manage and impossible for the consumer to discern, thus no net improvement. The only way to impose fiduciary standing is to make no exceptions and just eliminate the broker exemption to fiduciary standing. The uniquely America exceptionalism we so admire that makes us the envy of the world—is we adapt. The only outcome in a negotiation is that the fiduciary standard of care and the client’s best interest becomes negotiable. This is not a desirable outcome.

Snatching defeat out of the jaws of victory.

SCW

Ron A. Rhoades

Ron A. Rhoades

September 13, 2010 — 8:21 PM

Steven,

I appreciate your comments. While I would not characterize the policy decisions the SEC faces as a “negotiation,” I do acknowledge the fear, among many investment advisers such as myself, that the current fiduciary standard could be “watered down” significantly.

In a “perfect” world the SEC would have narrowly applied the broker-dealer exclusion from the definition of “investment adviser” found in the Investment Advisers Act of 1940, as Congress intended (and as stated in FPA vs. SEC). In addition, in a perfect world, Congress would have overturned the SEC’s loose interpretation of the broker-dealer exclusion.

But we do not live in a perfect world. Rather, we live in a world where special interests can, and often do, prevail on Capitol Hill. As a result, the Dodd Frank Act provides both hope, yet fear, to both sides of the broker-dealer / investment adviser fiduciary standard “debate.” And the SEC appears to have unparalled freedom to select a standard of conduct – provided that the standard is not less than the standard of conduct found in the Advisers Act (with certain statutory exceptions of undefined boundaries newly granted – proprietary funds, commission-based compensation, limited product offerings, and the ability to remove the fiduciary hat).

Central to the “debate” occurring at the SEC currently is what the fiduciary standard, as applied under the Advisers Act, currently requires. Within the securities industry some believe all that is required is disclosure, followed by consent of the client to proceed. However, others feel as I do – that there is abundant federal law (and state common law, which informs the federal law) to the effect that much more is required – i.e., client understanding of not only the existence of a conflict, but all of its ramifications and material facts surrounding same, followed by informed consent. And, that informed consent would not be granted by a client if the advice to the client by the “financial consultant” operating under a fiduciary standard were to choose a less-than-best alternative.

Hence, the purpose of this conference. To provide a forum for education, about the fiduciary standard of conduct. To provide a forum for a clear discussion of what the fiduciary standard is, and how it is (and should be) applied. No doubt there will be opposing views at the conference, perhaps among the academics who are participating, and certainly in the one panel discussion involving practitioners / securities law attorneys. But, I believe the conference offers an exciting opportunity to hear from the leading U.S. scholars on fiduciary law, as applied to the securities industry. And I am hopeful that all who attend the conference to observe, me included, walk away with new insights.

It’s not a perfect world. But that’s why educational forums, such as this one, are so valuable. This full-day conference on the fiduciary standard will likely assist all of us, and especially any in attendance who are involved in policy discussions or determinations. I suspect all in attendance will walk away better informed about the issues present, and their importance – not only to consumers, but also to the emerging profession of investment advisers, the restoration of trust in our capital markets system, and capital formation.

Thank you for your comments, and perspective. And thank you to the various organizations sponsoring the conference for bringing these academics together around this very focused, and important, topic.

Ron

Pat Huddleston

Pat Huddleston

September 15, 2010 — 11:43 PM

I encourage those who attend to think about how the possible end of pre-dispute arbitration clauses will impact any change in standard for broker-dealers. Having seen the dark corners of the securities industry as an Enforcement Branch Chief at the SEC and having represented investors in arbitration, I can tell you that unless customers have the choice to take their cases to the county courthouse, instead of to arbitration, any change in duty will provide no meaningful protection to investors. Arbitration awards give no reasoning, no analysis of whether the broker/adviser met the standard of care. The awards are worthless as guides to what conduct meets the standard and what conduct falls below it. They are no help to anyone. And there is no meaningful right to appeal.

If customers can take their breach of duty claims to court, experienced jurists — who appreciate the very high bar set by the fiduciary standard — can help later litigants understand the practical implications of the heightened duty.

Best of luck for a successful conference.

Pat Huddleston
Investor’s Watchdog, LLC
www.investorswatchdog.com

Brooke Southall

Brooke Southall

September 16, 2010 — 12:08 AM

Pat,

That is a very interesting perspective from somebody who has been on the front lines.

The fiduciary conversation can get so abstract and your comments get down to brass tacks.

Thank you,

Brooke

Stephen Winks

Stephen Winks

September 16, 2010 — 4:04 PM

Ron,

I am an optimist and am hoping for the best. Congress has established the client’s best interst is sacrosanct. The decision making criteria for each consideration is (a) is this consideration in the client’s best interest of (b) can this consideration be professionally managed in the client’s best interest. Congress has established whether a consideration is consistent with the industry’s business model is not to be a consideration, nor is the financial or other interests of the brokerage industry. Thus inviting the brokerage industry to participate and to take exception to pro fiduciart standing arguements deminishes our arguement. For example, under Dodd-Frank conflicts of interests (not in the clients best interest), should be professionally managed, not just disclosed as the conflict persists.

We made this mistake earlier in trying to include the brokerage industry in our fiduciary advocacy and in doing so lost our most salient arguements such as those (arbitration proceedings) cited above by Huctheson, luckily we were bailed out by the high profile Goldman Sachs Congressional testimony which swung public opinion in favor of regulatory reform. This thing is not over and the brokerage industry opposition should not be under estimated.

Let the brokerage industry have its own SEC conference—they certainly have done us no favors, nor should we expect them to until the SEC executes their Congressional responsibilities under Dodd-Frank.

SCW


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Mentioned in this article:

MarketCounsel | HamburgerLaw
Compliance Expert, RIA Set-up Firm, Regulatory Consultant
Top Executive: Brian Hamburger

Certified Financial Planner Board of Standards
Association
Top Executive: Kevin Keller



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