Almost four months ago, the SEC released its Request For Information to assess the costs and benefits of a potential uniform fiduciary standard for brokers and investment advisers. This week, the deadline for the comment period ends, and the SEC will begin to evaluate comments and come to a decision about whether to move forward with a fiduciary rule, to back away from it, or to simply partially "harmonize" the rules between brokers and investment advisers without fully imposing a uniform standard.
Ultimately, the SEC's cost-benefit analysis study will just be one of many steps in the progression towards a potential uniform fiduciary standard, but it is a critically important one, as the SEC's recent struggles in having its rules challenged have made it clear that the SEC is unlikely to proceed on the fiduciary issue unless it can get comfortable with the results of its economic analysis. This is especially true as the SEC tries to sort through thorny issues, including the fact that Section 913 of Dodd-Frank mandates that any uniform fiduciary standard must be at least as stringent as the Investment Advisers Act of 1940, but that the receipt commissions alone should not automatically run afoul of whatever the future rule will be.
While several "big hitter" organizations have already weighed in, it's crucial for all advisors who have an opinion on the matter to submit their own comments, whether just to generally support the implementation of a uniform fiduciary standard, or to more specifically offer up detailed comments on their own perspective and personal experiences on the issues, or any quantitative or qualitative information and data they have to share. Accordingly, for those who haven't already submitted a comment letter, now's the time - comments can be sent via email or using the SEC's online form through July 5th!
The SEC's formal Request For data and other Information (RFI) relating to the potential implementation of a uniform fiduciary standard for brokers and investment advisers, SEC Release No. 34-69013, File No. 4-606, was issued on March 1st. The purpose of the requested information and data is for the SEC to complete a cost-benefit analysis on the potential consequences of implementing such a standard; although the results of the SEC's prior study released in January of 2011, pursuant to Section 913 of Dodd-Frank, recommended the implementation of such a standard, the SEC has been wary to move forward, due to both intensive fighting from lobbyists, and trepidation from the SEC that any rule it issues will be challenged in court, by whichever side is unhappy with the outcome, and potentially struck down. The latter has been especially problematic given the SEC's string of recent court losses, including most significantly in July 2011 on the so-called "proxy access rule" which would have made it easier for shareholders to nominate company directors - the key issue in the case was the court's determination that the SEC's cost-benefit analysis was weak, and even since that turning point the SEC has been wary to issue new rules without such a study.
Difficulty Of Quantifying The Benefits Of Fiduciary
While many advocates of a fiduciary standard have long declared it "self-evident" that a fiduciary standard is superior for consumers as advisors act in the interests of their clients, the reality is that rulemakers want more substantive evidence that the outcomes are better, especially when weighed against the prospective costs, including the potential of greater oversight requirements and more significant liability exposure associated with a higher standard.
Of course, the reality is that right now, there is little evidence to suggest that the rate of complaints against fiduciary-regulated RIAs is higher than suitability-regulated registered representatives under FINRA, nor that the typical liability settlement for RIAs is materially higher than for brokers (notwithstanding the fact that the former are held in court while the latter are typically resolved by industry-friendly arbitration panels!), which suggests that the costs of fiduciary advice may not be higher as many suggest. Anecdotally, many advisors have told me that their costs for Errors & Omissions insurance actually went down when they left their broker-dealer and became an RIA instead, suggesting that even insurers who have to put their dollars on the line to back the liability claims against advisors believe that fiduciary advisors have less typical liability than brokers.
Nonetheless, the SEC wants to have a better handle on these issues before moving forward, as many in the industry who oppose a uniform fiduciary standard have harshly criticized it as raising costs for consumers and that therefore fewer people will have access to a financial advisor if a fiduciary rule moves forward. Unfortunately, though, "proving" that the benefits of a fiduciary standard outwiegh the costs will be difficult, as the systems are so different that it's almost impossible to make an apples to apples comparison, or "prove" counterfactuals like "here's how a client would have ended out better off had he/she not worked with a broker subject to the suitability standard."
Importance Of Commenting
While many major organizations have already weighed in with comments, from the Financial Planning Coalition to the chief securities regulator of Massachusetts, the reality is that even new comment letter can add further insights to the matter for the SEC, and all the letters are read and "scored" by the SEC to evaluate whether the comment feedback weighs more in one direction than another (in addition to looking at the substance of the letters themselves).
This is especially true because ultimately, there are many potential outcomes to this process. On the one hand, the SEC could decide that the benefits outweigh the costs, and implement rulemaking for a uniform fiduciary standard for brokers and investment advisers. Or the SEC could find that the costs outweigh the benefits, and decline to move forward, despite the prior studies supporting a fiduciary standard. Another alternative is that the SEC could decide not to extend a fiduciary standard for brokers, but to at least partially "harmonize" the rules between investment advisers and brokers. This outcome, too, has been controversial, as some have suggested that harmonization could ultimately lead to fiduciaries being regulated under a more rules-based standard that could ultimately undermine its strength (rather than harmonization lifting up brokers with a more principles-based system).
In addition, the weight of the comments may also be used to inform the SEC on direction regarding coordination with the Department of Labor, which is expected to issue its own set of proposals regarding a fiduciary standard for employer retirement plans (possibly extending fiduciary duty to IRA rollover decisions as well).
What To Do Now
The bottom line is that if seeing a uniform fiduciary standard is important to you - as I've written in the past, I have trouble seeing how anyone can hold themselves out as an "advisor" to the public and not be held to a fiduciary standard, as acting in the client's best interests is arguably the definition of advice! - then it's crucial for you to comment and weigh in with your perspective.
If you're not sure what to talk about in your comment letter, check out the SEC's full Request for Information (though notably, some commentators, including Knut Rostad of the Institute for the Fiduciary Standard, have criticized the assumptions that the SEC used in its RFI), and you can view some of the other comment letters that have been submitted as well. The list below includes several key areas identified by the SEC where it is specifically seeking advice, including:
- Quantitative and qualitative data about the costs and benefits of the current standards for brokers and investment advisers when providing advice to retail customers, and how those costs and benefits change under a uniform fiduciary standard;
- What a uniform fiduciary standard should and shouldn't entail; for instance, Section 913 of Dodd-Frank indicates that a uniform fiduciary standard should be no less stringent than the Investment Advisers Act of 1940, but also emphasizes that receipt of fees or commissions should not necessarily be a fiduciary violation. Accordingly, exactly how do you think a uniform fiduciary standard should be applied, what should be and shouldn't be allowed, and how should it be overseen?
- Should regulations between brokers and investment advisers be harmonized, and if so, which parts should be more unified and which should stay separate?
- What is the relationship between standards of conduct and the experiences of retail consumers in the delivery of personalized investment advice? For instance, the SEC suggests information about: how does it impact investor returns; security selection; are there differences in the characteristics of those who seek out brokers versus investment advisers; what are investor perceptions of the costs and benefits of the different regimes; what is the investor's ability to bring claims against their advisers under the different regimes; what is the effectiveness of disclosure practices, and what are the pertinent conflicts of interest, of the models?
According to Knut Rostad of the Institute for the Fiduciary Standard, key points that fiduciary-supporting advisors might wish to highlight in their comment letters include (see here for a more full explanation):
- How broadly should the fiduciary standard apply? Should it only apply to certain advice and communications, or should the fiduciary standard apply in any/all circumstances in which the advisor is engaged?
- Should fiduciary duties apply universally, or can they be waived? Which fiduciary conflicts are permissible with disclosure, and which should be outright prohibited? When is it impossible to fulfill a duty of loyalty even if conflicts are disclosed?
- To the extent that disclosure is necessary and appropriate, what is the depth of the disclosure? Is oral disclosure sufficient? Written forms that are distributed passively (e.g., on Form ADV)? Which aspects of disclosure are important enough that they should require a more proactive informed consent process?
- What are the potential harms of conflicts of interest, even if disclosed?
If you would like to comment, the deadline is this Friday, July 5th. You can submit a comment or other feedback on the request for information using the SEC's Internet comment form, or send an email to [email protected] (and include File Number 4-606 in the subject line).