Insights from the experts in investment fiduciary responsibility.

Fiduciary Comment Day Arrives

Posted by Byron Bowman on July 10, 2013

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>>>>>Friday, July 5, was the second day of a four-day weekend for many people; but for those interested in the SEC’s consideration of the fiduciary standard and the harmonization of investment adviser and broker-dealer regulation, it was “Comment Day.”  That marked the end of the period to respond to the SEC’s request for information (“RFI”) regarding the effects of the imposition of a fiduciary standard on broker-dealers that provide retail investment advice and the effects of harmonization.  Almost 30 comments were filed on Friday (with an additional couple of stragglers on Monday), bringing the total comments to 153 (at the time of this post).  The comments range from a paragraph or two by individuals to substantial filings by parties like SIFMA, Schwab, IAA, and FSI, all of whom had large interests at stake.  The comments were notable for the relatively few responses that actually included some attempt at providing the SEC with data for its cost-benefit analysis, purportedly the primary reason for the RFI.

fi360’s comment letter focused on four primary points:

  1. The results of a survey of AIF and AIFA Designees
  2. The findings of the Finke-Langdon research paper, which fi360 had sponsored in part
  3. The ability of investors to understand the difference between the suitability standard and the fiduciary standard
  4. Our belief that the imposition of the fiduciary standard on brokers should not be delayed for “coordination” with the DOL’s fiduciary standard regulations or for the “harmonization” of adviser regulations and broker regulation under FINRA.

We urge you to read the fi360 comment letter, which is posted here.  The survey revealed our Designees as experienced professionals (83% have worked in the financial services industry for more than 10 years), who primarily work for small firms (61% worked for firms employing 10 or fewer individuals), and are generally independent investment advisers (28%) or dually registered (31%). 

We asked our Designees a number of questions about the fiduciary standard.  Seventy-six percent of our respondents agreed that the fiduciary standard protects investors.  However, only 42% felt their clients were somewhat informed about the differences between the fiduciary standard and the suitability standard; even this was better than their prospects, though, only 17% of whom were somewhat informed about the differences.

Our Designees also answered a series of questions about the products that they used as fiduciaries, as opposed to products recommended under the suitability standard.  Forty-two percent of the respondents indicated that they used or recommended a different set of products and services since becoming fiduciaries.

Most significant of all, though, was the response of 53% of our Designees that the overall benefit of the fiduciary standard would outweigh the downside—even if a resulting increase in costs priced some investors out of the market.

The Finke-Langdon article summarized the authors’ comparison of the availability of products and services in states that imposed a fiduciary standard on brokers versus those states that did not impose a fiduciary standard.  Their conclusion was that the imposition of the fiduciary standard did not have a statistically significant effect on the products and services made available by brokers in states with a fiduciary standard as opposed to those states that did not impose a fiduciary standard.  This finding—based on actual experience—is in sharp contrast to SIFMA’s speculation that the imposition of the fiduciary standard would cost the largest Wall Street firms millions, if not billions, of dollars in additional compliance costs. 

The third section of our letter focused on certain regulatory and academic studies that conclude that investors are not knowledgeable about the differences between the fiduciary standard and the suitability standard.  However, the expectation of investors is that their financial professionals will abide by the principles of the fiduciary standard.  It is not clear that disclosure is a sufficient safeguard to protect investors from the disclaimer of this expectation.

Finally, we urged the Commission not to be distracted by the calls for “coordination” and “harmonization.”  These efforts will take significant time and only distract from the importance and urgency of the need for the imposition of the fiduciary standard to all retail investment advice.

While we feel that our comment letter contributed important arguments to this debate, we urge you to read some of the other comment letters that the SEC received.  Such letters can be found on the SEC website.

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