Compromise Reached on Fiduciary Standard Impasse

Congress has resolved an impasse over whether broker-dealers who give personalized advice to retail investors should be required to act in the best interests of those clients. The compromise calls for the Securities and Exchange Commission to conduct a six-month study on the subject. The commission will then have the authority to decide whether to impose a new standard.

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The debate had centered around the difference between broker-dealers and registered investment advisors. As their title suggests, RIAs' main duty is to advise investors about securities. Broker-dealers, on the other hand, actually sell the securities. RIAs have a fiduciary duty to their clients, which means that they must act in their clients' best interests. For their part, broker-dealers don't have to sell the best products that are available to their clients. Instead, their responsibility is to sell products that are deemed to be "suitable." For instance, a mutual fund with a front-end load and high annual fees may be suitable, even though it's not the best option.

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Advocates for unifying the standard say that ordinary investors often aren't aware that their broker-dealers are held to different rules. "Right now, most people, if you ask them, would think that there is a fiduciary relationship or a standard owed to a customer by a broker-dealer. They don't realize that there isn't," says Rep. Paul Kanjorski, a Pennsylvania Democrat who helped draft the House's financial reform legislation. "This is a good opportunity to say, "Look … customers should be protected and know that there are no conflicts of interest out there, no adverse positions out there, that people, whether they're wearing the hat of a broker-dealer or whether they're wearing the hat of a financial planner, owe their customer a fiduciary duty."

The House had hoped to impose the new standard without an SEC study. "This is not rocket science we're dealing with here," Kanjorksi said, noting that he didn't see what exactly needed to be studied. "This is pretty rudimentary stuff."

Still, some in the financial industry had raised objections, claiming that it wasn't clear how a fiduciary standard would be applied to broker-dealers. "Our concern is that applying such a subjective standard to broker-dealers … who, unlike registered investment advisers, sell products, makes it difficult to identify clearly which product is 'best,'" Tom Currey, the president of the National Association of Insurance and Financial Advisors, said in a statement. "Is best cheapest? Is it best premium relative to the benefit of the product? Is it best return on the investment? Is it the product with the best historic underwriting and service standards? It is a very uncertain standard." The Senate agreed, and in its proposal had called for the SEC to conduct a study geared toward clarifying these issues.

The compromise proposal has gotten support from reform advocates. "It frankly sounds like a huge victory for investors," says Barbara Roper, the director of investor protection at the Consumer Federation of America. Neil Simon, the vice president of government operations at the Investment Adviser Association, says that while the current agreement, like the Senate proposal, requires a study, the study's directive is much more favorable in the compromise language. He says that the Senate's wording had shown a "clear bias" and "certain skepticism." NAIFA, while partial to the Senate version, also supports the current compromise.

It remains to be seen whether the SEC will ultimately adopt the fiduciary standard for broker-dealers, but Roper remains confident. "An unbiased study would support a fiduciary duty," she says. Of course, it also doesn't hurt that SEC Chairman Mary Schapiro has been a supporter of implementing the change.