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SEC Fiduciary Report: Who Won? Advisers? Brokers? Or 401k Plan Sponsors?

January 26
03:45 2011

Late in the evening of Friday, January 22, 2011, the U.S. Securities and Exchange Commission (SEC) released its report on the Fiduciary Standard as required by the Dodd-Frank Financial Reform Bill passed last spring. In the accompanying 1183538_16750913_race_day_stock_xchng_royalty_free_300press release, the SEC concludes “many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers.” As a result, the SEC concludes it should adopt a uniform fiduciary standard “no less stringent than currently applied to investment advisers under [the] Advisers Act.”  Still, the 208 page report doesn’t provide specifics and even suggests investors should still “continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide.” In addition, with regard to a uniform standard, the study recommends the standard “should take into account the best elements of each regime and provide meaningful investor protection.”

While the early euphoria among proponents of the Fiduciary Standard suggests they had something to celebrate, this latter caveat leaves a gaping hole of unknown. The race is not over. In effect, the report doesn’t answer the basic question: Will the SEC create a “watered down” version of fiduciary services?

Let’s take a look at what the report actually said on just one element pertaining to the Fiduciary Standard – the Duty to Loyalty. On page vii of the report’s Executive Summary, the SEC writes:

Duty of Loyalty: A uniform standard of conduct will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest. The Commission should prohibit certain conflicts and facilitate the provision of uniform, simple and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest.

  • The Commission should consider which disclosures might be provided most effectively (a) in a general relationship guide akin to the new Form ADV Part 2A that advisers deliver at the time of entry into the retail customer relationship, and (b) in more specific disclosures at the time of providing investment advice (e.g., about certain transactions that the Commission believes raise particular customer protection concerns).
  • The Commission also should consider the utility and feasibility of a summary relationship disclosure document containing key information on a firm’s services, fees, and conflicts and the scope of its services (e.g., whether its advice and related duties are limited in time or are ongoing).
  • The Commission should consider whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements.

Furthermore, on page 113 of the report, we see this:

While the duty of loyalty requires a firm to eliminate or disclose material conflicts of interest, it does not mandate the absolute elimination of any particular conflicts, absent another requirement to do so. Thus, Dodd-Frank Act Section 913(g) expressly provides that the receipt of commission-based compensation, or other standard compensation, for the sale of securities does not, in and of itself, violate the uniform fiduciary standard as applied to a broker-dealer. It also provides that the uniform fiduciary standard shall not require broker-dealers to have a continuing duty of care or loyalty to a retail customer after providing personalized investment advice. Moreover, as discussed below, while the uniform fiduciary standard would affect certain aspects of principal trading, it would not in itself impose the principal trade provisions of Advisers Act Section 206(3) on broker-dealers. In addition, Dodd-Frank Act Section 913 provides that offering only proprietary products by a broker-dealer shall not, in and of itself, violate the uniform fiduciary standard, but may be subject to disclosure and consent requirements.

So, there you have it. It is possible, apparently under Dodd-Frank, to allow a fiduciary to engage in what has historically been considered a “prohibited transaction.” While it would seem the easiest solution to creating a uniform fiduciary standard would be to simply remove the broker exclusion from the 1940 Investment Advisers Act, it appears the SEC has chosen to rewrite the entire concept of “fiduciary standard.” Furthermore, it may be possible a new uniform fiduciary standard will merely continue the existing “regimes” with some added disclosures.

This possibility has not dimmed the enthusiasm of some advisers, but it does promote a healthy bit of skepticism. Charles Massimo, President of CJM Fiscal Management, a Registered Investment Adviser, says, “I believe RIA’s may have the upper hand with those clients who truly understand the differences. If so the biggest winner will be the plan sponsor. But I’m sure big Wall Street firms will find a way around this. They always do.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Tim Wood
    Tim Wood January 26, 17:31


    While we are fiduciaries to retirement plans and always have been, I have not been one of those folks that has jumped on the bandwagon clamoring for a legislative or regulatory definition.

    In the free marketplace I think we find the best solutions. Is what we do as appointed fiduciaries better for the plan sponsor’s management team? Yes, we place them in fiduciary isolation. Is what we do as appointed fiduciaries better for the participants? Yes, we fully disclose our costs and are not conflicted by revenue sharing and other egregious practices endemic to the industry. In short, do I feel that every plan is better off appointing a qualified discretionary fiduciary? Of course.

    However, do we really need more regulation? I think we are already seeing that the law of unintended consequences is dominating this situation.

    In my opinion, the fee disclosures are enough, we do not need a watered down fiduciary definition mandated by a faceless bureaucracy or legislative fiat.

    Agreeing to become the appointed fiduciary to a client’s plan and place my own financial life on the line is a moral calling for me because I have the conviction that placing my client’s interests before my own is morally correct, not something that would be influenced by an obscure federal rule.

    If we continue down this path, I fear that a watered down version will cheapen the value of ERISA fiduciaries and will end up providing unearned legitimacy to those whom do not place their client’s interest first. The end result? We will all be worse off.

  2. Larry Steinberg
    Larry Steinberg January 26, 18:45

    The big wall street houses won. They will still be able to game the system while us little guys battle compliance and the consumers have no idea what standard their financial advisor is being held to.

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