SEC Advisory Committee provides views on the federal fiduciary duty

As industry observers eagerly await Senator Christopher Dodd's revised financial reform bill to be released later this week, industry and consumer advocates on the SEC Investor Advisory Committee met on Monday to further discuss and recommend ways the SEC can act on its own to provide greater investor protections absent legislative action. 

During the Committee's afternoon session, the Investor as Purchaser Subcommittee, led by Mercer Bullard, opened up discussion on fiduciary responsibility, using a memo it had prepared on the fiduciary duty to facilitate the discussion.  Based on the memo and discussions at the meeting, the subcommittee is expected to work on recommendations for how the SEC can strengthen the fiduciary duty and to present those recommendations at the next committee meeting in a few months. 

The subcommittee's memo is a worthy read as it takes the time to discuss the substance and scope of the "federal fiduciary duty," which the subcommittee defines as the fiduciary duty owed by an investment adviser to his clients under the Investment Advisers Act of 1940 (Advisers Act).  The memo notes that statutes, SEC rules, and common law principles comprise an important aspect of the SEC's role in developing and implementing the federal fiduciary duty. 

An interesting discussion in the memo also notes that while a broker who provides investment advice and charges only commission is not subject to the Advisers Act and the federal fiduciary duty, the broker may be subject to a fiduciary duty in other contexts, such as state common law, ERISA, and state securities laws.  Moreover, broker rules promulgated by the SEC and FINRA can impose fiduciary requirements, such as the pending rules that would require mutual fund point of sale disclosures.  The memo acknowledges that the SEC and FINRA "might object to the suggestion that they have shoehorned fiduciary standards into a non-fiduciary regulatory scheme," but points out that "some broker rules have a decidedly fiduciary flavor."

All of this discussion is to suggest that the while the federal fiduciary duty applies only under the Advisers Act, a (non-federal) fiduciary duty can apply nonetheless in other contexts outside of the Act.  Moreover, the memo highlights that the scope and substance of non-federal fiduciary duties can be greatly impacted by SEC action that may range from informally guiding parties in their application of the fiduciary duty to formally preempting a conflicting standard.  On the other hand, the memo notes that SEC inaction "may leave the fiduciary space open to be filled by a variety of actors in that space, include state and federal courts, state regulators, FINRA and arbitration panels."

In preparing the memo, the subcommittee chose not to address pending legislation due to its uncertain fate.  By doing so, the subcommittee has drawn attention to the areas where it believes the SEC already holds authority with regard to the federal fiduciary standard.  What remains to be seen is how the SEC will exercise that authority if legislation fails to extend the fiduciary standard to brokers who provide investment advice.  However, with concrete recommendations expected to be delivered by the Investor Advisory Committee, the SEC likely will be on the hot seat to take action to respond to those recommendations.  

Comments

[Eric]

If the industry doesn't regulate itself, Congress will.