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IAA: Preserve advisers’ fiduciary standard, impose same on broker-dealers

Joe Mont | September 6, 2017

The Investment Adviser Association, a trade association representing investment adviser firms, has submitted a letter responding to SEC Chairman Jay Clayton’s request for comment on the standards of conduct for investment advisers and broker-dealers.

In June, Clayton opened a public comment period that may empower his Commission to either supplement or supplant the Labor Department’s rulemaking.

The IAA “strongly recommends” that the Commission preserve the well-established fiduciary duty for investment advisers under the Advisers Act and focus instead on adopting an equally stringent standard for broker-dealers under the Securities Exchange Act.

“Maintaining the status quo is not a viable option as it would not alleviate the considerable investor confusion that persists today,” the group said. It would also oppose a “disclosure only” solution because “such an approach would not be sufficiently protective of investors.”

IAA expressed concerns that “pursuit of a single uniform standard of conduct for advice to retail investors would dilute the existing Advisers Act fiduciary standard and lead to inconsistent treatment of retail and institutional clients, which are currently both protected by the fiduciary standard under the Advisers Act.”

“The SEC must not weaken the robust fiduciary standard that governs the relationship between investment advisers and their clients – and that has been the highest standard of professional conduct and investor protection for more than 75 years,” says IAA President and CEO Karen Barr. “Instead, the Commission should extend this powerful overarching duty to act in the best interest of clients to brokers providing investment advice.”

Specifically, the IAA is asking that the SEC: 

  • Preserve the fiduciary duty standard under the Advisers Act, which encompasses the important principles of loyalty and care. 
  • Affirm that all persons who provide discretionary investment advice to clients, regardless of the form of compensation, are subject to the fiduciary duty standard under the Advisers Act. 
  • Adopt a new best-interest standard of conduct under the Exchange Act for broker-dealers when making non-discretionary investment recommendations to retail customers that is no less stringent than the Advisers Act fiduciary standard and that similarly encompasses the overarching principles of loyalty and care.

To eliminate any confusion as to the status of discretionary advice under the federal securities laws, the IAA letter asks the SEC to formally confirm that any person providing clients advice about securities on a discretionary basis is subject to the Advisers Act because discretionary advice cannot be deemed “solely incidental” to brokerage services.

The trade association also asked the SEC to codify its long-held view that when a broker-dealer charges its customers a separate fee for investment advice, it is providing advisory services for “special compensation” subject to the Advisers Act.

IAA asks the SEC to adopt a new standard of conduct for broker-dealers that is principles-based to allow it to be tailored to broker-dealers’ core business activities and to provide flexibility for it to adjust to changing markets and business models through a layered interpretive approach.

To the extent that the Commission does not adopt an equally stringent standard under the Exchange Act, it should prohibit firms or individuals that are not subject to the Advisers Act fiduciary standard from holding themselves out in a manner that implies a fiduciary relationship, the letter says.