WASHINGTON -- John Taft, head of RBC Wealth Management in the U.S., weighed in on extending fiduciary responsibilities to broker-dealers, saying any extension must account for the distinct business practices of the sector.
An extension also must acknowledge that certain essential broker functions could not survive under the same fiduciary standard that governs investment advisors, adds Taft on a conference call with reporters this week.
Taft says the brokerage industry generally favors a tailored fiduciary standard to apply to BDs, but dismissed out of hand the notion of imposing the RIA fiduciary model on the sector.
"It's a non-starter," says Taft, who formerly served as the chair of SIFMA, where he helped draft the Wall Street trade group's position papers on the issue. Taft also has testified in support of a fiduciary standard that would give brokers more flexibility to operate than advisors have under their current fiduciary obligations.
"Those protocols work for discretionary management. You can't bring it over to the brokerage side and say we're going to impose the same rules for buying and selling securities," he says.
"It has to come along with new rules which operationalize that fiduciary standard when it comes to brokerage activities other than the investment advisory activities that brokers are providing to their clients."
Taft spoke on a conference call organized by the Institute for the Fiduciary Standard, a group that has been pressing for a strong, uniform standard that would apply to brokers providing investment advice to retail investors. The SEC has been mulling a new set of rules since the enactment of the Dodd-Frank Act, with commission officials raising concerns that many investors do not understand the differences between the broker and RIA models, and are not aware that they are held to different regulatory standards.
Late last year, an SEC task force issued a report endorsing a uniform standard, concluding, in part, that: "Investors may be harmed if they choose a financial adviser under a mistaken belief that the financial adviser is required to act in their best interest when that is not the case."
For advocates of stronger rules, the fiduciary standard that currently governs RIAs would be a welcome addition to the oversight of the brokerage sector, which is currently required only to make recommendations deemed suitable for retail clients, and has more flexibility in areas like disclosures of fees and conflicts of interest.
However, some pressing for stronger rules have reacted with skepticism when groups like SIFMA express support for a uniform standard, warning that industry lobbyists are working to shield the brokerage sector from the obligations to provide advice in clients' best interest under the 1940 Investment Advisers Act. If those efforts are successful, and the SEC moves ahead with a uniform rule, advocates worry that it might be so diluted that it would actually relax the fiduciary standard that applies to advisors.
"The worst outcome is the SEC adopts a rule that pretends to be a fiduciary standard that's really just suitability with a few added disclosures," Barbara Roper, director of investor protection at the Consumer Federation of America, said on a recent call kicking off what advocates are dubbing "Fiduciary September."
SEC Chairman Mary Jo White is trying to determine how to move forward on the issue at the divided commission, where two of the five members of the panel have openly questioned the need for a uniform fiduciary standard.
White has asked her staff to develop a menu of options for how to proceed with the fiduciary standard, which presumably will push back any formal movement on the issue until at least next year.
In the meantime, Taft is reiterating support for a uniform standard, but one that would not "overlay" the fiduciary obligations spelled out in the Advisers Act and subsequent case law to the brokerage industry.
Taft offers a concrete example. Chinese ecommerce giant Alibaba is planning an IPO in the United States, an event that has sparked considerable interest among investors with RBC, which also happens to be one of the underwriters of the public offering.
"Demand for shares of Alibaba (is) unbelievable," says Taft, who notes that the investment could well be in the best interest of his firm's clients. But because of RBC's involvement in the IPO -- something that would never be an issue with a pure-play RIA -- the recommendation that clients invest in Alibaba would be so conflicted that it would be impermissible under a strict interpretation of the advisor fiduciary standard.
"You need to write new rules if you want to bring the fiduciary standard over from the investment advisory world and apply it to brokerage activities," Taft says. "A simple implementation of the 40 Act fiduciary standard in my world doesn't work."
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