Thursday, February 19, 2015

My 2015 Wish List for DOL, SEC, States, CFP Board, NAPFA & You

As we approach 2015, I share with my "wish list' for the DOL, SEC, state securities regulators, and the various voluntary professional associations.

And I encourage YOU to undertake simple act, involving just a few minutes of your time, which may well serve to put us back on the path toward a true profession.


Fiduciary duties are applied to those who provide personalized investment and financial advice under different sources of law – federal statutory law (ERISA and the Advisers Act), state statutory law (state investment adviser statutes), federal common law, and state common law. Uniformity is currently lacking as to both when fiduciary duties are applied and, when they are applied, as to the specific fiduciary duties that are applied (or not applied).

While perfect uniformity cannot exist, the U.S. Department of Labor (DOL) and the U.S. Securities and Exchange Commission (SEC) and state securities regulators can achieve a much higher degree of uniformity in fiduciary law through close collaboration and via the adoption of the fiduciary principle for all providers of financial and investment advice.

Even in the absence of action by the DOL, SEC, and/or state securities administrators, professional organizations can lead the way to a better future for all those who desire a true profession for financial/investment advisors. Who will lead? Who will merely follow? Which organizations will embrace bona fide fiduciary standards of conduct for its members? Which organizations will be "fiduciary pretenders" without such a commitment?

Each of us can act now to move our professional organizations down the path toward a true profession, toward a better future for our fellow Americans who are the recipients our professional advice, and toward brighter economic future for America itself.


  • The DOL should apply fiduciary duties upon all who provide advice to all retirement plan sponsors and plan participants. Exemptions from the "sole interests" standard should be limited and used only where plan sponsors and participants are truly benefitted by the exemption.
  • The SEC should apply nonwaivable fiduciary duties to all registered investment advisers, even dual registrants.
    • When any investment advisory account exists for a client, or when fiduciary duties otherwise attach to the relationship, these fiduciary duties should extend to the entirety of the relationship, and any fiduciary-client relationship should not be capable of being switched to an arms-length relationship.
    • In order to prevent actual fraud (i.e., “bait-and-switch”) and to eliminate widespread consumer confusion, dual registrants who utilize titles denoting relationships of trust and confidence, such as “financial advisor,” “financial consultant,” “financial planner,” “wealth manager,” or “estate planner,” or who use designations which incorporate such terms, should be held to the fiduciary standard at all times, for all clients.
  • The SEC should also apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client.
    • In so doing, the SEC is merely restoring the principle - followed by the SEC and even the NASD (precursor to FINRA) prior to the 1970's.
    • The various states should then follow the SEC’s lead, modifying state statutes and regulations to apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client, and providing individual investors the right to bring claims under state law.
  • “Advice” should be broadly defined to include any circumstance in which the advisor states whether an investment strategy or investment product is recommended to a client. Mere descriptions of an investment product should not, without more, trigger application of the fiduciary standard; i.e., product seller-customer arms-length relationships should still exist under the law, provided that the arms-length nature of the relationship is laid bare and not obscured.

In the different applications of fiduciary law (such as trustee-beneficiary, employer-employee, partner-partner, director-corporation, etc.), the actual extent of the fiduciary’s duties are necessarily calibrated to meet the needs of the entrustor (client). Stricter fiduciary duties are applied in those circumstances where public policy recognizes the importance of non-conflicted advice and where great information asymmetry exists. The delivery of personalized investment and/or financial advice is one of these circumstances.

The DOL and the SEC should exercise their authority to require all fiduciaries who provide personalized investment and financial advice to adhere to a strict ethical code of conduct. The parameters of this ethical code of conduct remain principles-based, and hence adaptable over time to new developments in the delivery of financial and investment advice. Yet, more specific principles can be elicited to provide necessary guidance to fiduciaries, their clients, the courts and arbitrators. See my prior blog posts: Apply the Fiduciary Standard to Reduce the Number of Regulations, the Size of Government, and the Need for Wall Street Oversight and Proposed Professional Standards of Conduct for the Delivery of Personalized Investment Advice.


The SEC Chair, Commissioners and staff have limited resources. It remains highly unlikely, within the next two years, that a Republican Congress will permit the SEC to have "user fees" to finance more inspections of investment advisers. We must recognize that most RIA firms (those which provide personalized investment advice, not running their own mutual funds, hedge funds, or other pooled investment vehicles) don't pose such huge risks that they should be under the purview of the SEC. Inspections and enforcement actions take time, and in today's complex and ever-changing world of financial services there are simply a great deal of other matters (derivatives, credit rating agencies, crowdfunding, etc.) that are more deserving of the SEC's attention - given the risks to the financial system as a whole.

The obvious answer is to gradually move oversight of many more RIA firms to the states, over 5-15 years. Perhaps establish a goal that the SEC monitors investment companies / hedge funds (and their investment advisers), along with the very, very large RIA firms (for example, those with $1-2 billion or greater under management. (Such a numerical standard should be tied to inflation, as well, to avoid "SEC Oversight Creep.") Then, over a multiyear period, in incremental steps, oversight of many RIAs can be transferred from the SEC to the states.

This will necessitate more state resources. To a large extent several states are ahead of the SEC in terms of their authority to collect fees, as they impose fees for examinations as well as greater fees/costs when enforcement actions occur. 

Not all states will move as quickly as desired; hence, the SEC must be prepared to retain oversight of RIA firms where state oversight is not deemed to yet be robust and sufficient.

  • Understand the substantial public policy reasons which support the broad application of fiduciary principles to the delivery of personalized investment advice. If you don't understand the rationale, you'll never understand the fiduciary duties themselves, nor how they should be applied and enforced. 
  • As alluded to above, don't permit fiduciary duties to be "waived" by clients, as often inappropriately occurs (just look at the Form ADV, Part 2A, and client services agreements, of many dual registrant firms). Realize that estoppel plays a much more limited role in fiduciary law than it does in arms-length relationships.
  • Correct the inappropriate rule in which "portfolio turnover" is reported by mutual funds as the lower of purchases or sales of securities, relative to net assets of the fund, rather than their average.
  • Eliminate sharing of securities lending revenue by mutual funds and ETFs. Securities lending revenue belongs to fund shareholders. If the investment adviser to the fund desires additional compensation for undertaking revenue sharing activities, this should be reflected in the funds' management fees. If affliates are utilized to effect securities lending, then benchmarking of the fees of those affiliates should be utilized, with compensation paid to affiliates not to exceed average levels.
  • As mentioned above, ensure that those who promote themselves with the use of titles or designations which denote a relationship of trust and confidence don't then seek to absolve themselves of their fiduciary obligations. Compelling reasons exist for the distinctions to be made.
  • Don't permit any securities firm to use client testimonials. Or permit them all to. Just be consistent (and fair) about the rule. Of course, continue to prohibit misleading ads.
  • Repeal the "two hats" and "switching hats" temporary rule of Sept. 2007. Don't condone consumer confusion, nor encourage misrepresentation and fraud, via SEC rules.
  • Don't permit any securities firm to state "we act in the best interests of our client" or "we provide objective advice" (in any communication, including its Code of Ethics unless the firm and its advisors are willing to practice as bona fide fiduciaries to each and every client, at all times. Otherwise, bait-and-switch (via intentional misrepresentations) occur. And don't permit language which couches such obligations with language such as "we seek to" or "our advisors aspire to" act objectively and/or in the best interests of clients - as the fine distinction between actually doing vs. aspiring to are the source of much client confusion about broker's obligations to the client. As the SEC alluded to long ago, arms-length relationships should never be disguised.
  • Don't permit FINRA to state that all brokers and their registered representatives are required to act in their client's "best interests" unless all of these brokers and registered representatives are willing to accept bona fide fiduciary duties at all times. Otherwise, FINRA just continue to obfuscate by attempting to re-define "best interests," the common expression of the fiduciary duty of loyalty, as something less than what it means. This just creates more confusion for consumers, as well. Require FINRA to modify its previous statement (in "guidance" provided to its members), in this regard.
  • Further restrict soft dollar compensation. Inspect soft dollar arrangements, to ensure that any payments for research are comparable to the cost of research which could be obtained through other means, and ensure that the research is actually utilized.
  • Eliminate payments for shelf space and other revenue-sharing.
  • Eliminate payment for order flow. You can't achieve true best execution when such huge economic levers exist in opposition to the requirement for best execution. 
  • Investigate proprietary mutual funds when used by institutions (banks, investment advisory firms). Are all management fees and 12b-1 fees being rebated to the client of the fiduciary, to avoid double dipping? Are the administrative fees of the fund artificially high (seen in some banks' proprietary funds, when management fees are rebated but administrative fees are not).
  • Eliminate any and all "secrecy" clauses with regard to settlements; require public disclosure of all settlements through regulatory filings for same
  • When arbitration is agreed to by a client, require all arbitration in securities matters to be undertaken in independent (non-FINRA) forums. It is extremely important that tribunals be perceived by the public to be fair; as long as they exist under FINRA, that perception will not exist.
  • End the "revolving door" between the SEC and Wall Street (and the law firms that serve Wall Street firms). Ban any compensation bonuses to Wall Street executives that go to work for the SEC. Ban SEC staffers from any direct contact with SEC commissioners and staff for three years after they leave.
  • Eliminate inspections of custody arrangements by private auditors. Seek "inspection fees" or "examination fees" from Congress for taking these inspections in-house. A more focused fee, the amount of which is statutorily determined and which is tied to assets under advisement for which custody is assumed, would likely be more palatable to Congress than broad "user fees.") Properly undertaken, government inspections (whether by SEC or state securities examiners) are far more effective in uncovering fraud than private audits will ever be. Firms that don't possess custody would remain exempt from such fees.
  • Become again what the SEC once was - one of the most respected agencies of government.
  • Let the SEC once again steer our capital markets system to become the grease for the wheels of capitalism, not the sludge it is currently in which a major portion of corporate profits are siphoned off and never reach the hands of individual investors.


I encourage state securities regulators to actively lobby to oversee a larger percentage of RIA firms, following the suggestions set forth above.

I encourage state securities regulators to adopt non-waivable fiduciary standards of conduct for investment advisers, regardless of whether the DOL and/or SEC take the lead in this regard.

I encourage state securities regulators to clearly state that disclosure of a conflict of interest does not "cure" same, and that much more is required of a fiduciary providing personalized investment advice. Disclosure of all material facts, affirmatively made, and client understanding subjectively assured by the advisor. Informed consent - and with the realization that no client would consent to be harmed. And even then, the transaction proposed must be substantively fair to the client.

I encourage state securities regulators to compel all fiduciary advisors to adopt a fiduciary professional code of conduct, similar to the one I have previously suggested. This will guide the advisors on their fiduciary obligations, as well as provide insights for clients of advisors and examiners.

I encourage state securities regulators to pursue the other corrections to lax SEC oversight, set forth in my wish list above. The states play a vital role in protecting Main Street, and time and again over the last couple of decades the states have stepped up to protect individual investors when the SEC failed to timely act.

I encourage the states to adopt a single registration, effective for all states in which registration occurs, which RIA firms can pursue - in lieu of separate registrations at present. And a single registration fee for multi-state registration, with the bulk of that fee being paid to the state of the RIA firm's home office registration. Similar treatment can be accorded for individual investment adviser representative registrations. While the issues involved in splitting of fees and where oversight best occurs are sometimes complex, the need for simplicity in registration is important as a means of relieving compliance burdens, especially so if the states assume greater oversight of larger RIA firms.

I encourage state securities administrators to establish peer review panels for purposes of determining whether probable cause exists for certain violations, and to adjudicate certain actions brought against investment advisers. Experts are needed to judge adherence to a fiduciary's duty of care, and certain types of action involving a fiduciary's duty of loyalty and/or utmost good faith.

I encourage state securities regulators to inspect for custody more frequently. Asset verification is the essential government function.

I encourage state securities regulators to provide compliance policies and procedures, including codes of ethics, which investment advisory firms can adopt and follow - without the necessity for paying for costly compliance consultants.

I encourage both federal and state securities regulators to treat investment advisors as professionals, not as criminals. While the issue of asset verification requires frequent inspections, other inspections need not be frequent nor intrusive. Let the state securities regulators fight actual fraud (Ponzi schemes detected before they become large) and unregistered advisors. Investigate complaints when filed by consumers. But, otherwise, don't camp out for days at investment adviser's offices to ensure every "i" is dotted and every "t" is crossed. Government does not possess unlimited resources to inspect everything, and investment advisory firms (especially the smaller ones) don't possess unlimited resources to devote to compliance and inspections.


My wish list for the CFP Board is similar to that set forth above for the SEC. It's time to move the ball forward, by effecting a marketplace solution. But is the CFP Board up to the task?

First, recognize that the term "Certified Financial Planner(tm)" denotes a advisor, and misleads consumers that a relationship of trust and confidence exists if the CFP(r) Certificate does not adhere to fiduciary duties at all times. Hence, adopt the rule that all certificants are fiduciaries at all times when providing personalized investment or financial advice.

Second, adopt a similar definition of "advice" to that set forth above. Abandon the nonsensical multiple-part test currently utilized. In other words, define "advice" very broadly. If a CFP certificant is involved in the deliver of financial/investment products and/or services, make it mandatory that fiduciary duties apply. It's that simple.

Third, rather than watching the developments at the DOL and SEC, lead the way toward the bona fide fiduciary standard - an essential prerequisite for the establishment of a true profession. Require every CFP certificant to sign onto, and follow, a fiduciary oath. (See, e.g., The SEC's Failures, the Fiduciary Standard, and the Role of a Fiduciary Oath for Consumers and Professionals and also see The Committee for the Fiduciary Standard's Fiduciary Oath. And undertake substantial changes to your Standards of Professional Conduct to ensure a bona fide fiduciary standard is set forth therein (see recommendations to the DOL and SEC, above).

Fourth, end your costly advertising campaign. After you make the changes noted above, the media will do your advertising for you - they will direct consumers to seek out Certified Financial Planners(tm). Right now members of the media often don't suggest to consumers that they visit the CFP Board's web site, which is understandable given that not all Certified Financial Planners(tm) practice as fiduciaries at all times.

Fifth, if you don't change, realize that the CFP Board risks becoming irrelevant as a professional organization. While the CFP Board has done a great job in raising the educational standards for financial planners, and has the financial strength to become the true leader of a true profession, without adopting a bona fide fiduciary standard for all CFP certificants at all times the CFP Board will increasingly become irrelevant - at least to the growing number of advisors who desire to practice financial planning as bona fide fiduciaries and, as well, to the all-powerful members of the consumer media.

[I wonder if the CFP Board's long-standing cry of "one designation, one profession" as a means of advancing the CFP certification among financial planners might turn into "one designation, one non-profession (trade group)."]

Sixth, never undertake any initiative unless you closely collaborate with the Financial Planning Association (FPA). Collaborate, coordinate, and communicate. There should be very, very few initiatives undertaken by the CFP Board which don't receive the support of the FPA. Enough said.


If (as is likely) the CFP Board continues its current path, NAPFA must continue its leadership role for the emerging profession of financial advisors.

If the CFP Board continues down its current path, toward a future in which many CFP certificants are not fiduciaries and continue to provide conflicted advice (especially, as now occurs, when relationships of trust and confidence exist), NAPFA must re-consider the support of the "one designation" policy it adopted several years ago. Other designations, including CFA and CPA/PFS, should be considered as supportive of application for membership.

It appears to have been a couple of decades since NAPFA's fiduciary oath and its Code of Ethics received a good makeover. The news this year that NAPFA is working with the Institute for the Fiduciary Standard on "best practices" is a welcome one, yet "best practices" are not enough. It's time to step up to the table and initiate a wholesale review of its standards. (I hope such is already underway, but if it is not it's prime time for this to begin.)

NAPFA should not be timid. NAPFA has and will serve as the standard bearer for the profession. History has shown that each time NAPFA and its members have moved in a direction (embracing AUM fees as a permissible and more client-aligned business model, or its Fiduciary Focus campaign), other organizations and other advisors have followed, at least to a substantial degree.

NAPFA may be relatively small as an organization, but it possesses influence far beyond its size (a few thousand NAPFA-Registered Financial Advisors). The consumer media already knows of NAPFA and its members, and new initiatives from NAPFA to lead the profession will only solidify the reputation of NAPFA and its members.

NAPFA should also consider a trial of voluntary peer review, by members of other members, for purpose of determining whether best practices are being adhered to.


There are many other non-profit and profit organizations which support the application of bona fide fiduciary standards. I encourage them to test themselves, as follows:
  • Would the organization be willing to have all of their members be required to sign a non-waivable, always-applicable "Fiduciary Oath"; and
Why this test? It has always struck me that many organizations say they support a true fiduciary standard. In reality this is may be a marketing ploy for the organization, an attempt to punt the issue to a later time, or a wholly different view of what the fiduciary standard is all about. It's time we know where each organization really stands. Let them state what principles they agree with, and let them state with particularity principles with which they disagree (or are unwilling to adopt), so that we know where each organization really stands.


Lastly, my wish list involves each and every one of us. If we want to become a true profession, we must earn that right.

If we desire to become a true profession, bound together by a bona fide fiduciary standard and professional service in the public interest, let each one of us advocate for such, loudly and clearly. Starting with outreach to our various professional organizations.

Find a leader in your organization. Find her or his e-mail address. Or, better yet, e-mail several leaders of your organization. And then send this simple message:

"I desire to be part of a recognized profession, in which my professional colleagues and I serve the public interest as expert, trusted financial advisors. Accordingly, I desire that my professional organization adopt an up-to-date and robust Fiduciary Oath and Standards of Professional Conduct for all of its members during 2015. For additional guidance on these initiatives, please refer to Ron Rhoades' blog of December 9, 2014, located at Please advise me if (Name of Professional Organization) is committed to moving in this direction during 2015."

Ron A. Rhoades serves as 2013-14 Chair of the Steering Group of The Committee for the Fiduciary Standard. A frequent writer and speaker on issues confronting the financial planning and investment advisory professions, he also serves as Asst. Prof. of Business and Chair of the Financial Planning Program at Alfred State College, Alfred, New York. This blog represents the personal views of Ron A. Rhoades, JD, CFP(r), and are not necessarily representative of any organization with whom the author is associated. Ron may be reached via e-mail at:

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