Can RIAs tell clients they’re fiduciaries?
That the SEC had to furnish a reassuring answer this week — to a question about a status quo never before in doubt — is another sign of the upheaval generated by the commission’s new Regulation Best Interest rules package.
The latest flap developed
Wealth managers voiced their concerns on Twitter and elsewhere. TD Ameritrade’s Skip Schweiss, after spotting the word “eliminating,”
The SEC said “we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including … eliminating the word ‘fiduciary’ and requiring firms — whether broker-dealers, investment advisors or dual registrants — to use the term ‘best interest’ to describe their applicable standard of conduct.”
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Consumer advocates may turn to state regulators in hopes they’ll pass more stringent rules.
June 5 -
The new rule package will require firms to take a hard look at their compliance programs.
June 7 -
Concerns arose when the SEC first proposed its package of regulations. Instead of addressing these worries, the agency just codified them.
June 5
"There it is," Schweiss, who runs TD Ameritrade Institutional's retirement plan business, tweeted. "RIAs will not be able to use the word 'fiduciary' to describe the standard of care they owe clients." A spokesman for TD Ameritrade said Schweiss was not available for further comment.
In the investment advisory and law professions, fiduciary refers to the legally binding requirement to put a client's interests before those of her planner or lawyer.
Asked about the disclosure language, the SEC provided the following statement assuring RIAs they can indeed call themselves fiduciaries: "Investment advisors are fiduciaries, recognized and regulated as such by the commission. Recent commission action does not prohibit investment advisers from calling themselves fiduciaries."
Though the rules package was passed June 5, revelations are still forthcoming as industry insiders digest its more than 1,400 pages.
The regulator has faced a barrage of criticism from consumer advocates and some advisors over its Regulation Best Interest rules package, which included the aforementioned Form CRS as well as new regulatory guidance and interpretation. Critics have lamented that the rules fall far short of what they deem necessary investor protections. They’ve also accused the SEC of gutting RIAs’ fiduciary duty by amending requirements to permit advisors to satisfy their obligations through disclosure alone. Regulation Best Interest, which is not a fiduciary standard, relies heavily on disclosure to satisfy its requirements.
Wall Street firms and lobbying groups have generally supported the SEC.
The commission provided additional detail on the intent behind the controversial language to the Investment Adviser Association, which requested its own clarification: "Advisors may still use the term 'fiduciary' in [client relationship] Form CRS to further elaborate on the duties owed to their clients, for example when discussing conflicts of interest," the association's spokesman, Herb Perone, quoted the commission as saying in a release it circulated.
Had the SEC banned use of the word, that could have lead to a constitutional challenge, says Ron Rhoades, director of the financial planning program at Western Kentucky University.
"Commercial speech can be regulated," he says, "but it is still protected under the First Amendment."
