Posted by on March 05, 2013
>>>>On Wednesday, we discussed on the blog the anticipated SEC issuance of a formal request for information on the costs and benefits of imposing a uniform standard of conduct for investment advisers and broker-dealers. Two days later, the SEC made that blog timely by issuing its new release, “Duties of Brokers, Dealers, and Investment Advisers,” 72 pages of discussion and questions that a legion of law firm associates are now reading and summarizing for their firm newsletters. Briefly, the request for information seeks data and analysis of the imposition of the fiduciary standard (as it applies to investment advisers) to brokers that provide investment advice to retail investors. Rather than discuss the questions that the SEC asked, let’s consider some things that small-firm investment fiduciaries can do to contribute to the process.
First, it is likely that several professional and trade associations will survey their members to assemble aggregated data to present to the SEC. It’s unlikely that small firm personnel will have the time or the resources to determine what data will interest the SEC and where they can locate it in their files. However, the associations can be expected to structure member surveys that will elicit information that can then be aggregated and analyzed to provide coherent and incisive responses to the SEC’s questions. If you are a member of one of these organizations and receive such a request, we encourage you to participate.
This will be an important counter-weight to the responses that will likely be filed by the larger broker-dealer and investment advisory firms who have copious data and loads of computing power to slice and dice that data. Given the costs inherent in changing the business processes in large organizations, to say nothing of the power of inertia, we can expect that many of these large organization will argue that (1) the suitability standard applicable to broker-dealers—especially the new suitability standard recently implemented by FINRA—is not materially different from the fiduciary standard in terms of the recommendations given to customers, the securities placed in customer accounts, the performance of customer accounts, and the ability of customers to obtain redress for their grievances; (2) somewhat contrarily, the adoption and implementation of the fiduciary standard in place of the suitability standard will cause costly and time-consuming changes in the current business methods and processes, far in excess of any benefit that will be gained by customers; and (3) changes in the fiduciary standard—and its accompanying changes in business methods and processes—will deprive customers of beneficial services and desirable products that were formerly available.
Which leads us to the second thing that small-firm fiduciaries can do: write your own comment letters. You undoubtedly have assumed responsibility for accounts that were formerly serviced by an advisor under a suitability standard. What did you find when you took over the account(s)? What changes did you make? Did you eliminate investment products from the portfolio that were properly suitable, but not necessarily the best performer in their category? Did any of the products you replaced have compensation structures that benefitted the advisor, rather than the customer? What are your compliance costs as a portion of your overall expenses? (The big firms are likely to say that greater compliance costs resulting from any change will have an adverse impact on their profitability—but we believe that the compliance costs of small firms are already greater than that of large firms.) You may think that your solitary letter will not have much impact, but a slew of letters like this are likely to influence the SEC and its staff. They often give more credence to the comments of parties with hands-on experience than to comment letters that analyze the issues from thirty thousand feet.
The third thing that you can do is to encourage your clients to submit comments. Maybe you’ve had a client that had a bad experience in arbitration. Maybe you had a client that felt he or she wasn’t receiving recommendations that were in their best interest—but involved products that compensated the advisor handsomely. Maybe your client has just never been able to understand the difference between a fiduciary and an advisor under a suitability standard, or they don’t like the boilerplate disclosures in a standard account agreement. It’s relatively easy to file a comment; just refer your clients to this web page. Encourage them to explain that they are an investor with experiences or observations that the SEC may find helpful in its deliberations. (By typing “Comments attached” in the Comment box, you can attach a letter or memorandum—so you can carefully compose your comment before submitting it.)
Too often, many of us feel that we are affected by major changes in regulation over which we have no influence. The rule proposal that is likely to emerge from this process will control the delivery of investment advice far into the future. This issue is far too important for you to sit back and do nothing. Contact your professional associations; let the SEC know about your experiences; encourage your clients to file their own comments. Take part in the process!