Thursday, April 24, 2014

Incredibly, the SEC Sets Forth Its View: Suitability Standard is the Same as Fiduciary Standard

Recently I've been letting others know that we've likely lost much of the fiduciary battle in Washington, DC. For a recent summary of a presentation I did on this, see Chris Carosa's FiduciaryNews: "Is Famed Fiduciary Advocate Ron Rhoades Ready to Concede Defeat."

Why? Wall Street and the insurance companies have decided to do "whatever it takes" to defeat the application of a bona fide fiduciary standard. And the revolving door at the SEC means that Wall Street pulls the strings of the U.S. Securities and Exchange Commission through outsized influence. A key former SEC staffer has confirmed, in recent conversations, the extent of Wall Street's regulatory capture of the SEC.

NOW, the death of the fiduciary standard, at the hands of the SEC, has finally been confirmed. The SEC is on a path to adopting regulations which gut the fiduciary duty of investment advisers, in favor of suitability. In fact, in an incredible statement from an SEC staffer, the fiduciary duty has been equated with the much lower suitability standard. In nearly the same breath the "advantages" of FINRA have been seemining touted.

Compliance Intelligence has now provided a summary of a speech by the SEC's David Blass. The entire article can be found here: "SEC Office: Fiduciary Duty Isn't Higher than Suitability" (Subscription required.)

Here are a few excerpts from that article:

"The fiduciary duty imposed on investment advisers should not be considered to be any 'higher' than the suitability standard applied to broker/dealers, given the many other rules B/Ds must comply with, according to David Blass, chief counsel of the Securities and Exchange Commission’s Division of Trading and Markets."

"'I don’t think that the adviser fiduciary duty is higher than suitability,' rather they are separate concepts and suitability exists within the particular framework of B/D regulations, which includes many other rules, Blass told attendees at a Practising Law Institute event in New York Tuesday. 'You can’t think of fiduciary duty and suitability alone.'"

"The Division of Trading and Markets is helping to lead the fiduciary duty discussion within the SEC, Blass said, adding that it is taking into account the respective regulatory regimes and circumstances surrounding B/Ds and IAs. He pointed to the relatively low cost arbitration forum provided to B/D clients by the Financial Industry Regulatory Authority, and the lack of such an option for IA clients, as an example of the ways in which the industries and their relationships with clients differ."

Pro-fiduciary advocates have been warning that, given the substantial money that has been pouring into Washington, DC, and the revolving door between Wall Street (and the law firms that serve Wall Street firms) (and Mr. Blass is a perfect example of same), that the fiduciary standard is under attack. What we are seeing is the SEC adopting a "new federal fiduciary standard" (as proposed by SIFMA and FSI, Wall Street's main lobbyists). This "new federal fiduciary standard" is not even close to the bona fide fiduciary standard set forth in the Investment Advisers Act of 1940.

For an SEC official to equate the "suitability standard" with the much higher true "fiduciary standard" goes against testimony by several industry spokespersons before the U.S. Congress in recent years, in which they expressly acknowledged that the fiduciary standard was higher than the suitability standard. It goes against important judicial decisions, including the seminal U.S. Supreme Court case of SEC v. Capital Gains. It goes against numerous rulings and statements and reports issued by the SEC itself over the eight decades of its existence. And it goes against thousands of years of legal history.

While there exists some room for legitimate debate about the scope of fiduciary duties, from reading this article about Mr. Blass' comments I wonder if I'm on the same planet as he is. Unfortunately, this appears to be confirmation of what we have long suspected - the SEC is seeking to re-define the fiduciary standard of conduct, the highest legal duty under the law, out of existence.

To all those who ...
   - are concerned about the fiduciary standard of conduct;
   - who desire consumers to receive expert advice in their best interests; and
   - who desire a true profession for financial planners and investment advisers ...

what now?


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