The fiduciary standard is getting much play this week in Washington. Today, the House Financial Services Committee will hear testimony on the discussion draft of the Investor Protection Act that was released last week. As currently drafted by the Committee, the draft bill would codify the fiduciary standard in the federal securities laws by directing the SEC to adopt rules requiring all broker-dealers and investment advisors that provide advice to retail investors "to act in the best interest" of the investor. This is a change from legislation drafted by Treasury over the summer that would have given the SEC authority to adopt rules that would require broker-dealers and investment advisors to act "solely in the interest" of investors.
Significantly, the draft legislation would also provide the SEC with greater resources and more predictability in its funding by including budget figures through 2015 and giving the SEC the authority to collect fees from registered investment advisors. The advance budgeting and fee collection capability would allow the SEC to better plan and budget for hiring and technology upgrades, as well as give it the resources needed to improve its examination and enforcement programs, which have received sharp criticism in the wake of the Madoff scandal.
The fiduciary standard also was the subject of discussion yesterday during the second meeting of the new SEC Investor Advisory Committee. In particular, after subcommittee break-out discussions, Investor as Purchaser Subcommittee Chair Mercer Bullard (President of Fund Democracy, Inc.) reported the subcommittee's recommendation that brokers providing investment advice to retail customers be held to a fiduciary duty.
Bullard noted that the fiduciary duty should apply both for services actually provided and expectations created in clients. When asked about client expectations, Bullard explained that this is based on the law of agency in which there can be actual or apparent trust or confidence, and that in all cases a client would need to point to something the broker did to create an expectation of trust that would warrant the application of the fiduciary duty. Bullard also noted that a fiduciary duty is higher than the suitability standard for some purposes, providing as an example the receipt of differential compensation, a conflict of interest that is not required to be managed or disclosed under the suitability standard, but would be treated differently under the fiduciary standard.
The Investor Advisory Committee eventually will make formal policy recommendations to the SEC, but it will be up to the SEC to decide upon whether to accept and implement those recommendations in its guidance and rulemaking. If Congress enacts fiduciary legislation currently being considered, final recommendations from the advisory committee, which was created to promote investor interests, could provide much insight to the SEC as it seeks to implement and provide clear guidance on the fiduciary standard and its applicability to brokerage and advisory activities.
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