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Archive for the ‘Fiduciary duty’ Category


Department of Labor fiduciary duty proposal delayed

The Department of Labor timeline for releasing the proposal for an expanded fiduciary duty for advisors who work with retirement plans has been delayed. 

Speaking at the Financial Services Institute’s Financial Advisor Summit, Phyllis Borzi, the Labor Department’s assistant secretary for the Employee Benefit Security Administration, said that her agency is continuing to revise its proposal, and that it is more concerned about getting it right than delivering it in on the previously announced schedule.

But while the industry will not see the DOL’s proposal in October, it is coming. Borzi says she’s not stepping down and will not just let the SEC handle fiduciary duty. “We don’t have overlapping jurisdictions,” she explained saying there are two investment “buckets,” a retirement one and another for other securities.  And while the SEC regulates securities across both, Borzi says retirement savings is “sacred money” and advisors should be held to a higher standard.  She did note, however, that from the very beginning, the DOL has worked with other regulators including the SEC.

“The impact of this regulation is to attack problem, or address the problem of conflicted advice,” she says.  As to what the new proposal will cover, Borzi says Individual Retirement Accounts, IRAs, will definitely be covered. “We’re going to cover them,” she says, adding that there’s an even grater need in IRA marketplace, there’s a need to protect investors.

Fiduciary duty conversation continues

New rules that could require certain brokers to act in the best interests of clients should enhance laws already in place for some financial advisers, a coalition of investor advocacy and trade groups wrote late on Thursday.

The letter to Securities and Exchange Commission Chairman Mary Schapiro from groups that include the Consumer Federation of America and the AARP is the latest development in a debate about upgrading the standards of brokers who give personalized investment advice. Calls for the rules change gained traction during the 2008 financial crisis.

While the brokerage industry generally supports the change, it is concerned about how it might affect the way brokers are compensated, among other things. Brokers are paid through the commissions they receive when investors buy and sell securities. Many other types of financial advisers receive a flat annual fee for their services.

Brokers may earn more from some investments they propose to clients, something investor advocates say could motivate a broker to push a more lucrative product. The flat fees investment advisers charge, along with the different rules they follow, typically prevent such conflicts of interest, say investor advocates.

The coalition letter addressed points made in a July letter to the SEC from the Securities Industry and Financial Markets Association, or SIFMA, a trade group representing major retail brokerages.

SIFMA expressed support for a fiduciary standard for brokers, but said using established case law and legal interpretations of “fiduciary” in the context of the brokerage industry would be “commercially impractical” because of the differences in how brokerages and investment advisers run their businesses.

SEC Urges Uniform Fiduciary Duty For Brokers and Advisers

U.S. securities regulators on Friday called for a new uniform fiduciary standard for broker-dealers and investment advisers that would require them to put retail customers ahead of their own financial interests. The recommendations, laid out by the Securities and Exchange Commission in a study reviewed by Reuters late on Friday, would drastically alter the landscape for broker-dealers who under current laws are only required to recommend products that are “suitable” to mom-and-pop investors.

It could also potentially mean changes for investment advisers if the SEC opts to replace their fiduciary standard with a new one, although the study says it would be “no less stringent” than what they face today.

Under today’s standard, advisers must act in a client’s best interest. The study was required under the Dodd-Frank financial law, and its findings are likely to help shape future rule-making at the agency. SEC Chairman Mary Schapiro has long called for harmonizing regulations between brokers and advisers who offer retail customers advice, saying investors may not know the difference between those acting in their best interest and those who are just peddling products.

But both Republican commissioners issued a harsh critique of the study on Friday, saying it failed to provide evidence that investors are “being systemically harmed or disadvantaged”. They also questioned if a uniform standard would eliminate any investor confusion.

SEC to Decide Fiduciary Standard

Legislators finally reached a compromise on the fiduciary standard bill late Thursday after fierce last-minute wrangling over its contents.

While the House’s version pushed for the Securities and Exchange Commission to create a fiduciary standard, the Senate preferred instead to have the SEC study differences between its fiduciary standard and the suitability standard many brokers are held to by FINRA, without giving the SEC the power to do anything about it.

The final bill contained elements of both—the SEC is charged with studying differences in fiduciary and suitability standards over the next six months, and then potentially create rules that fill any gaps, although the language of the bill doesn’t make this mandatory. Currently, registered investment advisors are held to a fiduciary standard under the Investment Advisers Act of 1940, whereas investment advisors who hold securities licenses report to FINRA, which requires advisor recommendations to be “suitable” to a client’s needs. RIAs have long complained that the suitability standard is not good enough and that anyone selling investment products should do so only when it is in a client’s best interests.

Banks, in particular, could be hurt by a blanket fiduciary standard, which could hypothetically put an end to platform programs if a new rule stipulated that investors pay a flat fee for anything they buy because many bank clients have fewer assets to invest. Heywood Sloane, managing director of the Bank Insurance and Securities Association notes that the bill’s current language suggests proprietary products, commissions and selected lists of products aren’t off the table, but he remains wary of what the SEC might decide. “As the SEC works through this, it has to allow people to provide services in a way that earns them a living,” he says. “If not, you’ll see only high-net-worth individuals taken care of because the margins will be too tight on smaller accounts.”

New Salvo in Debate Over Fidiciary Duty Reform

The debate over the inclusion of a single fiduciary standard in financial reform legislation is now being hit with a new lobbyist assault under the guise of legislator education. The insurance industry lobbyist machine, perhaps the most vehement opposition to sweeping fiduciary reform, now wishes for the Senate to authorize a study over the implications of passing a single fiduciary standard for both broker/dealers and Registered Independent Advisors (RIAs). Currently, RIAs have a fiduciary duty to their clients that amounts to greater liability in the event of a bad investment. This duty requires them to act in the best interest of their client when giving recommendations and advice.

The call for a new study is seen by many as a stalling technique with the goal of dissuading current supporters of a single fiduciary standard in the interim. What makes this tactic more transparent is the fact that a currently published study conducted by the Rand Corporation addresses the need for the legislation being considered.

Investment News reports that in response to the call for a new study which would be paid for with tax-payer dollars, a letter was sent by a laundry list of financial industry associations arguing that insurance groups have made up “myths” in an attempt to dissuade a single fiduciary standard. The January 7th letter was signed by:

– Fund Democracy Inc.

– The Certified Financial Planner Board of Standards Inc.

– The Consumer Federation of America

– The Financial Planning Association

– The Investment Adviser Association

– The National Association of Personal Financial Advisors

– The North American Securities Administrators Association Inc.

The letter, which was sent to Senator Chris Dodd (D-Conn) and Senator Richard Shelby (R-Ala), charges that the insurance industry is engaging in, “a particularly virulent attack on the legislation, aimed at eliminating entirely the provision requiring a fiduciary duty for financial professionals and replacing it with an unnecessary study at taxpayer expense.” It remains to be seen whether or not the study will be authorized, but it is clear that the debate over inclusion of a single fiduciary standard in the financial reform legislation is far from over.

Senator Dodd on Fiduciary Duty: Can He Withstand the Lobbyists?

After Senator Christopher Dodd’s surprise announcement last week declaring he would not seek reelection, many have begun to wonder about the policy ramifications this development will have on the remainder of his term in office. Financial reform is one such area of policy reform that the senator is tackling with much speculation over his resolve concerning fiduciary duty reform.

The two bodies of thought that have emerged on both sides of the aisle favor either a strong or a weak fiduciary duty provision. The strong provision would clearly put broker-dealers under the current fiduciary duty requirements levied on registered independent advisors (RIAs) by requiring such brokers to register as RIAs. The weak provision would require brokers to be registered as RIAs, however, the Securities and Exchange Commission (SEC) would be given more authority to write the new fiduciary duty at some time in the future. This position is adamantly supported by the banking industry as it is far less definitive than the strong provision and is more likely to result in little change to the business model of broker-dealers than the alternative.

Dodd currently supports the so-called strong provision, this being in contravention of the House approved language in the Wall Street Reform and Consumer Protection Act of 2009. Many who advocate for the strong provision are hoping that by announcing his decision to relinquish his seat, Dodd will be freed from listening to the lobbyists of the banking industry and therefore will more steadfastly pursue the strong provision before his time in the Senate comes to a close.

Even if Dodd’s resolve remains unfazed by lobbyists’ attempts to change his position, it remains to be seen if other members of the Senate will act likewise.

 

Proposed Financial Reform Endangered by “Hat Switching” Provision

The investment adviser world is frenzied over a provision included in the financial services reform legislation recently approved by the House of Representatives. The so-called, “hat switching,” provision is one sentence long and buried within the expansive legislation. The provision, part of H.R. 4173, reads as follows:

“Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”

This can be read as meaning that the fiduciary standard owed to a client disappears once investment advice is given.

The move towards creating a single fiduciary standard would be greatly hindered if such a provision makes it into the final language of the bill. The provision would protect discount brokerage firms from a continued fiduciary relationship with a client after initial advice and/or sale of a product.

It can be expected that this is not the last time we will hear of this provision.

Senate Banking Committee Releases Discussion Draft on Financial Reform Legislation

The Senate Banking Committee has released a discussion draft of proposed financial reform legislation (see Investor Protection Act) titled, “Restoring American Financial Stability Act of 2009.” The discussion draft varies from the version recently approved House Financial Services Committee in one key respect: it is better for investors. The Senate version provides wide-ranging protections for investors that are more inclusive than the House approved version.

The difference is best exemplified in certain key reform areas, perhaps most notably in relation to redefining fiduciary duty. Fiduciary duty is simply the duty one owes a client to always invest with the client’s interests being the main concern. Currently there exists a two-tiered system between independent broker-dealers and registered investment advisers. The hope of many is for this system to become more streamlined, and both version attempt to accomplish this.

The Senate discussion draft proposes a simple solution to this problem. The Senate solution is to eliminate the broker-dealer exclusion from the definition of, “investment adviser.” This would make broker-dealers held to the same standards as investment advisers; a definitive win for investors and a vote towards increasing investor confidence.

The House approved version takes a more hands-off approach. Their version would require the Securities and Exchange Commission (SEC) to draft rules to synchronize the current two-tiered system. The likelihood that such a move would create as stringent a standard as the current fiduciary duty to which investment advisers are held is unlikely.

Either version, House or Senate, may become part of the finalized version of the financial reform legislation. It remains to be seen which will win out, but one thing is for sure, the debate will carry on.

Brokers and Their Fiduciary Duty

Investment advisers and consumer advocates have applauded President Obama’s proposal to establish a fiduciary duty for broker-dealers offering investment advice.
“We think it’s great,” said Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors in Arlington Heights, Ill. “There should be a fiduciary standard for all advisers.”

Richard Salmen, president of the Denver-based Financial Planning Association, agrees.

“I’m encouraged by the fact that the administration is proposing a fiduciary standard for all that provide advice to the public,” he said. “That’s a positive sign.”

The proposal was part of a historic reform package unveiled by the White House last Wednesday that is intended to overhaul nearly every aspect of Wall Street in order to prevent another financial crisis.

Both the FPA and NAPFA have been ardent proponents of requiring brokers offering investment advice to be brought under a fiduciary standard, which would require that they put their clients’ interests ahead of their own. Currently, brokers are required to meet a suitability standard, meaning the advice and products they offer have to be suitable for their clients

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