SEC Proposes Fiduciary Duty for Investment Brokers Advising Retail Clients

By | November 22, 2013

Investment brokers advising retail customers should be held to a standard that requires them to recommend products that are in the best interest of clients, according to a proposal from a group advising U.S. regulators.

Members of the Securities and Exchange Commission’s Investor Advisory Committee will vote today to recommend the regulator impose a fiduciary duty on brokers who provide personalized investment advice. Brokers are currently required only to steer clients toward “suitable” trades or investments, while other professionals known as investment advisers have a fiduciary duty to put a client’s interest first.

“There is behavior that is permissible under a suitability standard that isn’t in the best interest of the customer,” said Barbara Roper, a member of the advisory panel who supports the recommendation. “Investors end up squandering money to pay excessive fees for mediocre investment options — not in every case — but it is permissible under the existing standard for brokers.”

The 2010 Dodd-Frank financial overhaul told the SEC to study the existing standards for providing personalized investment advice to retail customers. In a January 2011 staff study, the agency said many retail investors are confused by the different roles played by investment advisers and brokers and recommended a uniform fiduciary standard apply to both.

As a first step toward new rulemaking, the SEC requested information in March from the industry and public on the costs and benefits of imposing a fiduciary duty.

$45 Trillion Managed

The SEC and the Financial Industry Regulatory Authority oversee 4,195 brokerage firms holding more than 113 million retail and institutional accounts, according to Finra. The SEC oversees more than 11,000 investment advisers managing more than $45 trillion, according to a recent report by the Treasury Department’s Office of Financial Research.

Brokers who simply provide customers with recommendations to buy, sell or hold a security and don’t provide ongoing portfolio advice wouldn’t have a fiduciary duty under the committee’s approach. Those who “hold themselves out” as advisers, “based either on the titles they use or the manner in which they market their services” should have a fiduciary duty, the committee said in its recommendation.

Investment advisers who work under a strict standard of duty and loyalty have pushed the SEC to impose equivalent rules on brokers, who can wind up providing advice during the process of executing orders for customers.

Uniform Standard

The Securities Industry and Financial Markets Association, the main lobbying group for Wall Street securities firms, opposes the recommendation because it seeks to apply to brokers laws written for investment advisers, the group said in a comment letter.

Sifma supports a uniform fiduciary standard written under the laws that apply to brokers, which take into account their business model, said Kevin M. Carroll, managing director and associate general counsel at Sifma.

“The existing fiduciary-duty standard that applies to advisers was built and designed with advisers in mind, and not with the broker-dealers,” Carroll said in a phone interview. “We see legal and practical problems with imposing that existing regime on broker-dealers.”

The five-member SEC may be divided over the topic. While Democratic Commissioner Luis A. Aguilar has said he supports extending fiduciary duty to brokers providing investment advice, Republican Commissioner Daniel M. Gallagher has said he isn’t convinced new rules are needed.

‘A Nudge’

The proposal “is a nudge, it’s a reminder this is an important priority for investors,” Roper said in a phone interview. “It also puts down the markers of what a fiduciary standard ought to include and ought to look like and how the commission should approach it.”

SEC Chairman Mary Jo White said last week that the SEC’s effort has “real traction.” White hasn’t stated whether she personally supports imposing a fiduciary duty on brokers.

“It’s a high priority for me to figure out where we are going with respect to that,” White said at Sifma’s annual meeting on Nov. 12. “You’ve got brokers and investment advisers, particularly at the retail level who are providing the same advice to retail investors. Retail investors are not entirely sure who they’re dealing with.”

–Editors: Anthony Gnoffo, Maura Reynolds

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