fi360 Blog

Dodd proposal a fiduciary disappointment

Though not a surprise, the absence of the extension of the fiduciary standard in Senator Christopher Dodd's new proposal for financial regulatory reform is still a disappointment.  On Monday, Dodd spoke of plugging gaps and creating greater regulator accountability, but failed to back up these promises on the fiduciary front. And while groups like FSI and NAIFA pushed for and now applaud the proposed study of investment adviser and broker-dealer regulation, it's investors that would remain out there unprotected while the SEC studies issues of which it already has expert knowledge.  

The looming question is what's next?  Well, the truth is financial reform legislation is far from being a foregone conclusion.  Dodd must still gain bipartisan support for his proposal in order to successfully push it through an aggressive Senate Banking Committee mark-up schedule and then guide it through the Senate floor.  And let's not forget that a final Senate bill will still need to be reconciled with the bill passed by the House last December. As a lawyer, it's often my job to be the Debbie Downer in the room, and while this run down of the legislative process may sound dismal for investor protections, there may be hope just yet.  

Concerns about fiduciary responsibility are not U.S. specific

It was not long after we published the Practices in our first fiduciary handbook in 2003 that we were approached by a New Zealand financial services firm.  They had been referred by a common business associate and wanted to learn more about these defined fiduciary practices; it was something they felt was missing in New Zealand.  It was not our intention to expand beyond the U.S. so soon, but since that initial inquiry we have published fiduciary handbooks in New Zealand, Canada, and Australia and there is interest in doing so in Singapore, South Africa and the United Kingdom.  We have found that the Practices are substantially the same in these developed countries: managing money is managing money.

We have written numerous posts over the past several months highlighting what has been happening with financial services reform in general, both legislative and regulatory, and efforts to extend the fiduciary standard in particular.  In light of what is happening here, we decided to take a closer look at what is happening elsewhere and see if it might provide some useful insights.

New Zealand and Australia are grappling with the same issues and coming to the same conclusions; more must be done to protect those whom the fiduciaries serve: plan participants, beneficiaries, and investors.  In November 2009 the Parliamentary Joint Committee on Corporations and Financial Services in Australia completed what is commonly referred to as the Ripoll Report (www.aph.gov.au/senate/committee/corporations_ctte/fps/report/index.htm), which looked at issues associated with the collapse of Australian financial services firms including Storm Financial and Opes Prime.  The report made eleven recommendations; Recommendation 1 stated;

"The committee recommends that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL (Australian Financial Services License), requiring them to place their clients' interests ahead of their own."

Our adjunct faculty member in New Zealand recently heard from a colleague to whom he has preached the fiduciary message for several years now who said:

"I have noted that the Ripoll Report into financial advice in Australia is talking about enshrining advisers fiduciary responsibilities in legislation and that the code committee here (New Zealand) is looking at advisers fiduciary responsibilities.  It seems the time may well be coming where accredited fiduciaries would be well regarded."

New Zealand often looks to the U.S. to get a sense of where the financial services industry is headed.  With respect to fiduciary responsibility, we're please to see it appears Australia, New Zealand and the U.S. are heading in the same direction.

DoL seeking a few good nominees for the ERISA Council

Five seats open up in November for the Department of Labor's Advisory Council on Employee Welfare and Pension Benefit Plans (aka, the ERISA Advisory Council) and the DoL is soliciting nominations. The Council's function is to advise the Secretary of Labor on her functions under ERISA. The members are appointed by the Secretary to a three-year term in which they take part in at least 4 public meetings/hearings a year tackling 3-4 issues per year, eventually submitting a report on each issue with the Council's findings and recommendations.  Issues on the table for 2009 include Stable Value Funds and Retirement Security in the Current Economic Conditions , Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries , and Approaches for Retirement Security in the United States.  Past issues have included disclosures, plan funding, fees, participant and advisor education, and communications. The full list of past reports can be found here.

From the official press release, here are the details for nomination procedures:

Interested persons or organizations may nominate qualified persons for membership. Recommendations must be submitted by letter, resolution or petition and signed by the person or, in the case of a nomination by an organization, by an official representative of the group making the recommendation.

Nominations should briefly describe the candidate’s qualifications and the group or field for which the candidate is being nominated, including contact information and indicating the candidate’s acceptance of the appointment if offered.

Nominations should be submitted to Larry Good, executive secretary, ERISA Advisory Council, Room N-5623, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210 or to good.larry@dol.gov. Recommendations must be submitted on or before September 15, 2009.

We think this is a great opportunity for anyone who is interested in influencing policy under ERISA and we would be especially pleased to see some fi360 members, with their knowledge of fiduciary processes and dedication to promoting a culture of fiduciary responsibility, represented on the Council.

SEC Investor Advisory Committee Expresses Interest in Fiduciary Standard

The newly-created SEC Investor Advisory Committee gathered today in an open meeting at SEC Headquarters.  The goal of the committee will be to provide a greater voice to investors, and the committee will have the ability to make recommendations to the SEC on policy issues.  Today's meeting represents the committee's formal introduction to the public and also provided the committee the opportunity to discuss its agenda and organization.   

While discussing proposed future agenda items this morning, committee members showed great interest in further examining fiduciary duties.  Stephen Davis, Senior Fellow and Project Director for the Yale University School for Management's Millstein Center for Corporate Governance, specifically called for a full review of fiduciary duties and suggested that a subcommittee be formed to fully analyze the current status of the fiduciary duties in U.S. law and to compare it to international standards.  Mark Anson of Nuveen Investments noted the importance of defining what is a fiduciary standard, while Mac Hisey of AARP Financial Incorporated and AARP Funds highlighted the need to understand what investors think the standard is as well.  Barbara Roper of the Consumer Federation of America voiced concern that the fiduciary standard may be part of a broader issue related to investors' confusion about the difference between investment advisors, broker-dealers, and other investment and financial professionals and suggested that the committee take a step back and ensure that all underlying issues, including fiduciary duties, be considered when addressing investor confusion.  Mercer Bullard of Fund Democracy America noted the importance of providing predictability of what is required under a fiduciary standard in certain areas, such as how to disclose conflicted fees, while still providing some regulatory flexibility to address unpredictable areas on a fact-by-fact basis. 

Given these comments, it is clear that fiduciary duties will be a focal point at one or more future committee meetings.   This afternoon, the committee will continue to discuss future agenda items and is also expected to address possible refinements to the disclosure regime, including disclosure to investors in 401(k) plans.  For more information on the SEC Investor Advisory Committee, including today's meeting agenda and a briefing paper on disclosure issues can be found here.

Schapiro Continues to Support a Fiduciary Standard

In her testimony before the House Financial Services Committee today, SEC Chairman Schapiro continues to support the adoption of a fiduciary standard, stating: 

I therefore believe that all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation. As such, I support the standard contained in the Department of the Treasury bill recently put forth entitled the "Investor Protection Act of 2009." That bill explicitly would enable the Commission to promulgate rules to provide all broker-dealers and investment advisers providing investment advice to retail customers act solely in the interest of their customers or clients without regard to the financial or other interests of the financial service professional. The establishment of this investor-focused approach as a consistent standard for all broker-dealers and investment advisers providing investment advice would represent a significant step forward in the protection of retail investors.

The key to the Chairman's recent statements is the reference to "personalized investment advice."  An issue many industry leaders and regulators alike are currently struggling to address is where to draw the line between the fiduciary standard that applies to personalized advice and the suitability standard that applies to securities recommendations and general advice, so that professionals and investors can be clear on the services being provided and the duties that attach to those services.  If the Investor Protection Act of 2009 is enacted, it would be up to the SEC to define and enforce that distinction.

Vote on regulator for consumer products delayed

Chairman of the House Financial Services Committee Barney Frank has delayed a vote that would create the Consumer Financial Protection Agency until September. Frank’s announcement seems to signal that tension on Capitol Hill is mounting with regard to adopting some of the Obama proposals.  It’s being reported that the Administration will start making a new effort to gather support and remind legislators why reform is needed.  It’s not clear yet what this all means for Investor Protection Act that would give the SEC the authority to adopt a fiduciary standard, but as most of the opposition is currently directed at creating new entities and shifting power among agencies, the fiduciary legislation could still have a good chance of moving forward.

Read more:

Doubts Slow Financial Regulation Overhaul on Capitol Hill [WSJ]

Frank delays legislation on consumer protection [The Hill]

Rep Frank: U.S. financial consumer agency needs work [Reuters]

Legislators and SEC Keep Up the Pace on Regulatory Reform

Legislators on Capitol Hill will continue to keep up the pace with hearings and mark-ups on regulatory reform in an effort to get as much done as possible before the August recess.  Hearing schedules, prepared testimony, and live webcasts can all be accessed via the links provided below for each committee.

This week, the House Financial Services Committee will hold hearings on monetary policy and systemic risk today and will hear regulators' perspectives on the Obama plan, including those of SEC Chairman Mary Schapiro, on Wednesday and Friday.  The Senate Banking Committee also will consider monetary policy on Wednesday and systemic risk regulation on Thursday.  

The House Financial Services Committee also tentatively plans to mark-up pending legislation this week and next week.  Draft legislation likely to be included in these mark-ups sessions include the Consumer Financial Protection Agency Act of 2009 (H.R. 3126), the Investor Protection Act of 2009, the Corporate and Financial Institution Compensation Fairness Act of 2009, and the Private Fund Investment Advisers Registration Act of 2009.

Separately keeping up its own pace to bring about reform, the SEC will meet Wednesday afternoon to consider whether to propose a rule that would reign in "pay to play" practices by investment advisers.  The proposal will seek to address pension fund scandals that drew headlines earlier this year.

SIFMA Supports "A New Federal Fiduciary Standard"

SIFMA Executive Vice President, Randolph Snook, is poised to testify today in a House Financial Services Committee hearing that SIFMA supports "a new federal fiduciary standard of care that supersedes and improves upon the existing fiduciary standards” and is applied “to both investment advisers and broker-dealers when they provide personalized investment advice about securities to individual investors."  Snook's testimony further states that a fiduciary standard should require broker-dealers and investment advisers to put investors' interests first and avoid conflicts of interest. 

However, in articulating SIFMA's position, Snook further states that the new federal standard should provide "investor choice to define or modify relationships with their financial services provider based on the investor's preference" and "must be sufficiently flexible to be adapted to the products, services and advice chosen by the investor." These additional statements seem to describe something other than the fiduciary standard currently set in law that defines firm obligations an investment adviser must fulfill, and could bring into question whether SIFMA is simply using the word "fiduciary" while continuing to lobby for what is really a "universal standard of care" that adapts to the existing business models of broker-dealers.  Decide for yourself and read SIFMA's position on a federal fiduciary standard starting at page 21 of Snook's prepared testimony.  For more on SIFMA's decision to back a fiduciary standard, check out this Wall Street Journal article.

To see how other industry representatives plan to support a fiduciary standard in their remarks before Congress, see page 16 of the ICI President Paul Schott Stevens' testimony and page 2 of the testimony of Diahann Lassus, a representative of the Financial Planning Coalition.

Consumer Groups Call For Stronger Fiduciary Legislation

Today, while providing community and consumer advocates’ perspectives on the Obama Administration’s Financial Regulatory Reform Proposal in a hearing before the House Financial Services Committee, representatives from the Consumer Federation of America (CFA) and the U.S. Public Interest Research Group (U.S. PIRG) called on Congress to strengthen proposed legislation that would give the SEC authority to adopt a fiduciary standard for all investment professionals that provide advice.   

CFA Legislative Director, Travis Plunkett, specifically warned Congress of the danger of allowing the SEC to adopt a “fiduciary duty lite” standard and recommended the following changes be made to legislation drafted by Treasury :

[T]he words fiduciary duty of care and loyalty that are referenced in the President’s plan should be included in the legislative language itself, so that the fiduciary duty exists in law and not simply through the adoption of SEC rules. … In addition, the SEC should be required, not simply authorized, to adopt the appropriate standards. Finally, Congress should clarify, preferably through the legislation itself but if not through accompanying report language, that: 1) the intent is to ensure no weakening of the fiduciary duty that currently applies to advisers and 2) that a fiduciary duty, once entered into, cannot easily be abandoned; brokers who are covered by a fiduciary duty when giving advice cannot escape that requirement when selling the products to implement that advice.

U.S. PIRG Consumer Program Director, Edmund Mierzwinski, agreed with the CFA’s position that legislation should not include “‘watered down’ language that provides less than the most robust protection for investors” and called on Congress to “mandate that the SEC adopt the highest standard of care in order to avoid overly broad standards and that broker-dealers not be able to escape that higher standard of protection.”

Plunkett’s full testimony on behalf of the CFA can be found at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/travis_plunkett_fsc_testimony_july_16,_2009.pdf, with his remarks on the fiduciary duty specifically beginning at the bottom of page 22 of the prepared testimony.  Mierzwinski’s testimony for the U.S. PIRG is available at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/mierzwinski_7.16.09.pdf, and his remarks on fiduciary responsibilities start on page 17.

Schapiro's testimony today on fiduciary duty

SEC Chairman Schapiro is currently testifying before the House Committee on Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises.  Here is what she said on fiduciary duty in relation to the Treasury’s proposed legislative language:

We are also closely examining the broker-dealer and investment adviser regulatory regimes and assessing how they can best be harmonized and improved for the benefit of investors. Many investors do not recognize the differences in standards of conduct or the regulatory protections applicable to broker-dealers and investment advisers. It is essential that when investors receive similar services from similar financial service providers, the service providers should be subject to the same standard of conduct and regulatory requirements, regardless of the label attached to the providers. I therefore believe that all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation. I support the standard contained in the bill Treasury recently put forth, which would require broker-dealers and investment advisers to act solely in the interests of their customers or clients when providing investment advice.

Also of note is that she highlighted the limited resources the SEC has to oversee existing registered IAs, and that requiring hedge fund advisers to register would require an increase in SEC resources. In my opinion, this could play into the debate on whether advisers should be subject to SRO oversight.  Her full testimony is available at: http://www.sec.gov/news/testimony/2009/ts071409mls.htm.

Hearings on regulatory reform continue throughout the week, view the House schedule here: http://financialservices.house.gov/schedule.html and the Senate schedule here: http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Home.