The Obama Plan for a Fiduciary Standard - Will Congress Get It?

On Friday, Treasury announced that the Obama Administration delivered to Congressional leaders proposed legislation that includes steps for establishing a consistent standard of care for investment professionals that provide advice. The proposed legislation would codify recommendations from the financial regulatory reform plan released by the Administration in mid-June and specifically seeks to amend the Exchange Act of 1934 (governing broker-dealer regulation) and the Investment Advisers Act of 1940 (governing investment adviser regulation). In particular, the amendments would:

1. Allow the SEC to adopt rules establishing "that the standards of conduct for all brokers, dealers, and investment advisers, in providing investment advice about securities to retail customers or clients … shall be to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice";
2. Require the SEC "to facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with investment professionals"; and
3. Give the SEC the authority to adopt "rules prohibiting sales practices, conflicts of interest, and compensation schemes for financial intermediaries (including brokers, dealers, and investment advisers) that it deems contrary to the public interest and the interests of investors."

There a few things to note about this legislation...

First, in the past the SEC has not had specific statutory authority to adopt standards of conduct for investment intermediaries, which is why in the case of broker-dealers this is an area that has largely been governed by rules promulgated by self-regulatory organizations, such as FINRA. Second, the Obama Administration and Congress are currently seeking to provide similar authority to adopt standards for fair dealing and compensation structures to the proposed Consumer Financial Protection Agency, which would regulate specified consumer financial products and services, such as mortgages and credit cards, as well as certain financial and investment advice.

Third and most significantly, while it is an important step for Congress to provide statutory authority to the SEC to adopt a consistent standard of care and ban certain conflicts of interest, the proposed legislation leaves the SEC with a wide range of discretion. In particular, it would be up to the SEC to decide whether it would in fact adopt standards under its new authority, and the agency would have further discretion to shape those standards and prohibitions. Important to this point is the fact that the proposed legislation does not address the current provision of the Investment Advisers Act that exempts brokers providing "solely incidental" advice. Thus, the Commission would appear to have the latitude to adopt scaled standards.

A big question that has come up in the past when talking about Congressional action on a fiduciary standard is whether members of Congress "get it." The truth is that the answer may be "no," but now is an important time to make sure that they do and that they realize the dangers associated with leaving the door open to discretionary rulemaking related to the near term adoption of a fiduciary standard for investment professionals that provide advice.  While it is important for the SEC to have authority in the long term that will allow it to react to changes in services and provide better protections to investors, it is also important that a strong message is sent regarding the need for codification and application of the existing fiduciary standard across the board now.

In hopes of delivering this message to Congress, fi360 CEO Blaine Aikin and I have joined the Committee for the Fiduciary Standard and have signed a petition started by the Committee seeking to ensure that any new legislation or regulation adopted meets the requirements of "the authentic fiduciary standard." If you would like to see Congress take a firmer stand on the fiduciary standard in legislation enacted this year, we encourage you to read and sign the petition as well. In the near future, we will also provide details on how you can join the Committee and further support its efforts.