ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

7th Part of a Series on the Regulation of Financial and Investment Advice, and the Future of the Profession

Part 7: Ron’s 2019 Regulation Wish List

Part A: Have the SEC Alter How the Advisers Act is Applied and Enforced.

• If a person or firm holds out as a "financial adviser" or "wealth manager" or "retirement consultant" or "financial planner" or otherwise uses a title that evokes an adviser-client relationship, they should be held to the fiduciary requirements of the Advisers Act - at all times and without exception.

• If the primary role of the person is to provide investment advice, rather than to execute transactions, the "solely incidental" exclusion to the definition of investment adviser should be applied properly and that person should be required to register as an investment adviser and to comply with the fiduciary duties arising from the Advisers Act.
• Large amounts of broker-dealer advertisements suggest that advice is the primary component of the broker-customer relationship, and it is certainly understood that way from the standpoint of the customer.
• The process of executing trades no longer requires the skill it took in the 1930's, due to the involvement of automated systems, and the improvements in market liquidity.
• Registered representatives have been provided education on "trust-based sales techniques," without understanding that the formation of a relationship of trust and confidence with a client leads to fiduciary status under state common law.
• The recommendation of another investment adviser should be subject to the fiduciary standard of the Advisers Act. This includes recommendations of separate account managers, as well as recommendations of mutual funds. (The doctrine of suitability was originally intended to shield brokers from liability when their primary role was in executing a trade for a customer; the doctrine should have never been extended to the recommendation of pooled investments.)

• No more wearing of two hats.No ability to switch hats
• Once you are a fiduciary to a client, your status as a fiduciary continues, and it extends to all aspects of the adviser-client relationship.
• Say what you do. Do what you say.
• A fiduciary steps into the shoes of the client, and acts - with all of the expertise required of a professional adviser - with total loyalty to the client's interests.
• The S.E.C. Should Take the Position that Estoppel and Waiver have Limited Applicability to fiduciary relationships.Sect. 215 of the Advisers Act needs to be properly applied to prevent both "disclaimers" of core fiduciary duties and seeking client "waivers" of them. Even under state common law, which informs the Advisers Act, it is well-known that estoppel and waiver have limited application in fiduciary-client relationships were a vast disparity of knowledge and expertise exists.
• Don’t Rely on Just Disclosures.The SEC must realize that, although the securities laws generally are based upon disclosures, the Advisers Act went much further. We have fiduciary standards because disclosures are largely ineffective. A huge body of academic research supports this conclusion.
• Adopt Meaningful Disclosures of the Nature of the Relationship (Broker-Customer vs. Adviser-Client), the Receipt of Compensation, and Whether the Prudent Investor Rule Applies.See a prior article in this series for a form such disclosure might undertake.
• Let's not keep permitting "particular exceptions" (as the late Justice Benjamin Cardozo opined) to erode the fiduciary standard of conduct.
• Let's conform the industry to the fiduciary standard.
• Let’s not diminish the  fiduciary standard at the whims of the broker-dealer and insurance industries.

Part B. The States Should Move to Adopt Fiduciary Standards for Brokers Who Provide Investment Advice.

·    In the prior articles in this series, I have suggested proposed regulations and/or legislation that the states could adopt. Since the SEC is failing to act under the authority given it under the Dodd-Frank Act of 2010, the states need to step up to the plate and protect their citizens.

Part C: Clean Up Mutual Fund Regulation.

• Europe and Canada have stronger disclosures of mutual fund / ETF fees and costs than the U.S. possesses. We lag behind, again, instead of leading the way.
• "Portfolio turnover" is measured incorrectly.It should not be the lower of sales or purchases divided by the fund's net assets, but the average of them. This important statistic - as the SEC now permits it to be calculated - can often mislead investors. For ETFs, sales and purchases of securities that occur via the process of redemption units – if they have no negative impact upon the fund’s shareholders – should be excluded from the computation of portfolio turnover.
• Require in all mutual fund / ETF advertising truthful comparisons to broad-based indexes.No more comparing active funds only against indexes that exclude index funds in their computations.
• For example, no advertisements should be permitted in comparisons to Lipper indices that exclude, from the index for that asset class, passively managed funds. (Given that passively managed funds, on average, outperform actively managed funds in the same asset class, their exclusion is, in my view, inherently misleading.)
• Do away with state-based and municipality-based retirement accounts.This is not the essential role of government. And, they are not done well.
• The federal government’s Thrift Savings Plan is widely admired for its low costs. But, there exists a dearth of asset classes in the TSP, especially with respect to foreign securities and factor-based funds. Governments should step aside.
• Prohibit the fund company and its investment adviser from receiving compensation from securities lending revenue. Certain funds and ETFs are now advertised as "zero-fee" - when in fact some of these funds generate profits for their fund companies by taking a substantial percentage of securities lending revenue. Investment advisers to funds should receive their compensation for whatever investment advisory activities they undertake from the management fees they receive, which are fully transparent. Securities lending revenue should belong to the fund's shareholder, in its entirety (except for a reasonable fee paid to third-party firms that enable securities lending transactions to occur, and RFPs should be required of mutual fund companies when seeking such services.)
• Eliminate 12b-1 fees. See discussion below.

Part D: Solve the Problems in Defined Contribution Plans

·     Apply ERISA to all defined contribution plans.Want to see a bad retirement plan? Just look at what teachers are offered in their governmental 403(b) plans, which are not subject to ERISA.

·     Plan sponsors– whether for-profit businesses or governmental entities – are not investment experts. Provide a way, under ERISA, for plan sponsors to be exempt from liability for investment decisions.

o   If a plan sponsor: (1) engages a 3(38) fiduciary; and (2) that 3(38) fiduciary possesses adequate liability insurance (as set forth by rule by the DOL, from time to time), then the plan sponsor should be absolved from liability for the investment recommendations made to the plan.

o   This would encourage more businesses to adopt defined contribution plans, and would shift potential liability for poor investment recommendations to those who undertake investment recommendations - and those who make them should be experts, knowledgeable about all of the requirements of the prudent investor rule, and possess few conflicts of interest.

·     “NIRA” – One Retirement Account to Rule Them All. We have a dizzying array of defined contribution plans and various types of IRA accounts. The numerous regulations create tax and other traps for the unwary, and create higher costs of American business. Let’s consolidate all of them into one plan, that can be adopted by a simple form (such as the form for SIMPLE IRAs, but with more flexibility). This “New IRA” account, which I’ve previously written about, should also be easily portable - if an employee leaves the retirement plan, the employer can just "de-link" the account, and the custodian of the account can just continue it as an individual account. (If the custodian does not desire to provide service to individual accounts, then another custodian could be named to assume the account, with a minimal amount of paperwork involved.)

Part E. Reduce Broker-Dealer Conflicts of Interest.

1. Eliminate Payment for Order Flow. It interferes with broker's duty to effect best execution. Such payments are largely non-transparent. And current broker-dealer firm practices of advertising "free trades" - when the trades are not, in fact, free, would be done away with. (I know the SEC's Division of Trading and Markets has initiated a pilot program to restrict payment for order flow, which I generally support. But the proposal does not go far enough.)
2. Eliminate 12b-1 fees. They don't benefit fund shareholders. Investors don't understand them. They often continue for as long as the fund is held. And ... in my view, they are "relationship-based compensation" (as the SEC itself puts it) and hence amount to "special compensation" - which should trigger the application of the Advisers Act.
3. Cap Compensation for the Sales of Variable Annuities, Non-Publicly Traded REITs, etc. Unlike mutual funds, which are subject to FINRA caps on compensation, and to which breakpoint discounts apply, strong caps and breakpoint discounts don't apply to a host of other products. Why not?
4. Principal Trades - Put Back in Place the Tougher Requirements. The Advisers Act permitted principal trades by dually registered firms (or affiliated brokers of investment advisory firms) due to the recognition, at the time, that for some securities (mostly municipal bonds) there might only be one brokerage firm or bank acting as the market maker, or agent on behalf of the issuer. Principal trading should be far less than it was in 1940, when the Advisers Act was enacted. In 2007 the SEC enacted rules that relaxed some of the requirements for principal trades; this relaxation of rules should be re-examined. Furthermore, a brokerage firm engaging in a principal trade should bear the burden of proving best execution, and that it is not dumping securities.

Part F. Congress Should Act to ...

1. Remove the tax break afforded to life insurance contracts that permits FIFO treatment of withdrawals from cash value life insurance. This ability to withdraw basis first contradicts the investment treatment afforded other forms of investment. Moreover, it has led to a huge travesty - the sale of cash value life insurance (which, nearly always, is hugely expensive relative to other investments) for its touted tax advantages, and as a "retirement savings vehicle." The reality - what insurance companies don't want consumers to know - is that significant withdrawals (by withdrawals of basis, followed by loans) from cash value insurance policies (particularly whole life policies, where the death benefit can seldom be adjusted downward) present a very substantial risk of policy "implosion" - and a hugely negative tax consequence to the owner of the policy.
2. Regulate all fixed annuities - both those with fixed interest rates, and equity indexed annuities (a.k.a. fixed indexed annuities) as securities. Yes, Senator Grassley would have a fit. But the reality is - these are forms of investment, and should be subject to the same scrutiny as other pooled investment vehicles.
3. Repeal the law that permits payment of soft dollar compensation. This statute leads to millions and millions paid in higher commissions by some mutual funds to broker-dealers, in return for research that is often never utilized. Soft dollar compensation arrangements hurt fund shareholders, and I for one will never recommend a mutual fund that pays soft dollar compensation.

Part G. Work to Reduce Regulatory Overkill.

Standards of conduct can be enhanced, and when they are adopted then conduct will change accordingly. Remedies for violations of the fiduciary standard of conduct exist primarily through the mechanisms for the resolution of client complaints. That’s the beauty of principles-based standards of conduct – they don’t require the adoption of multiple specific regulations – at least as to the regulation of financial and investment advice.

Beyond that, I question the need for much of the other regulations that have been imposed upon registered investment advisers in recent years. Investment advisers are professionals - treat us like such. There is a lot of paperwork generated in RIA firms due to these new regulations, and a lot of costs are incurred in association with meeting these regulatory requirements. Much of this work simply exists to provide examiners with items to examine.

• Every regulation on the books should be reviewed. Does it work? What is the burden of the regulation, versus its benefit?
• Increase the number of RIA exams for verification of assets (i.e., custody); but decrease substantially the number of RIA exams for everything else.  Use the SEC's limited resources to combat the most egregious frauds.

Part H. Disband FINRA.

Take a good hard look at FINRA. With hundreds of pages of rules, it still has utterly failed the vision of its creators - Senator Maloney and others - who sought to create an organization that would raise the securities industry's conduct to the highest levels.

In fact, FINRA has opposed raising standards at every turn. FINRA embraces conflicts of interest at every turn, rather than seek to minimize them - even broker-dealer fines levied by FINRA become part of FINRA's budget (thereby lessening the fees assessed against broker-dealer firms!).

Consider whether FINRA's oversight of market conduct regulation should be transferred back to the SEC and to the states.

Or perhaps eliminate FINRA - the worst "regulator" in the world - altogether!

At a minimum, the SEC should conduct a long-overdue comprehensive review of FINRA - and it will find that FINRA has failed miserably to meet the expectations of the enactors of the Maloney Act, which led to FINRA's existence.

Ron A. Rhoades, J.D., CFP^® is an Asst. Professor of Finance at Western Kentucky University's Gordon Ford College of Business, where he serves as Director of its nationally recognized Personal Financial Planning program. This article represents his views, alone, and are not those of any institution, organization or firm with whom he may be associated. Follow Ron on Twitter: @280lmtd. To contact him, please email: Ron.Rhoades@wku.edu.

ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

Part 6 of a Series on the Regulation of Financial and Investment Advice, and on the Emerging Profession

Part VI: A Wish List for an Accelerated Path toward a True Profession

We must plan strategically for a profession of personal financial and investment advisers, if we desire to take advantage of the opportunities that may arise to move in that direction. Many actions are needed – and you can contribute to these efforts. 

By Ron A. Rhoades

Imagining a True Profession

A strong ethical foundation. A recognized body of knowledge, acquired by the practitioner and applied expertly to benefit the client. And the view that collectively we exist to serve not just the interests of our clients, but the wider interests of society at large. These are the foundations for a true profession.

When I imagine a true profession for personal financial advisers, I begin with a bona fide fiduciary standard. One in which the client’s best interests remain paramount at all times. Where most conflicts of interest are avoided. And where the remaining conflicts of interest are properly managed. 

And I envision that all personal financial advisers should be, and will become, experts. Armed with the foundational body of knowledge we have come to know as the Certified Financial Planner™ curriculum. And striving toward ever-higher levels of expertise via tough-to-obtain specializations.

FINRA and Other Challenges

Yet, imagining this vision of the future is not enough to make it happen. Indeed, many forces exist that would deny any true profession from coming into assistance.

For example, FINRA has long sought to both regulate investment advisers, while seeking to limit the application of the fiduciary standard of conduct to both financial planning and investment advisory activities.

As I’ve alluded to in prior articles in this series, Wall Street lobbyists and their lawyers – what we may term the “securities bar” – promote limited fiduciary duties that lie far below that of the classical understanding of the fiduciary standard of conduct.

The revolving door at the S.E.C. has, to any casual observer of the inexplicably weak rules the Commission has recently proposed, resulted in what can only be considered “regulatory capture” of the agency by the broker-dealer community – at least at the very highest levels.

Commercial interests dominate the current public discourse, with huge amounts of money going into Congressional coffers. In many of the visits I (and many other fiduciary advocates) make to Capitol Hill, to promote fiduciary standards and common-sense reforms, we are often welcomed with the comment that for each visit pro-fiduciary and consumer advocates undertake, 20 visits are made from professional lobbyists hired by broker-dealer firms, insurance companies, asset managers, and their many lobbying organizations.

The opponents are many, and they are strong. But victory is not only possible, but probable. For truth and righteousness underpin our efforts to create a true profession.

The Fiduciary Advocacy Movement Builds

A decade ago advocacy surrounding the fiduciary standard was in its infancy, with only a few consumer groups and investment adviser organizations promoting it – often through individual visits lacking any coordination with each other. Then came the Great Financial Crisis, consideration of legislation that became the Dodd Frank Act, and the U.S. Department of Labor “Conflicts of Interest” and related rules. While setbacks have recently occurred in the courts and at the S.E.C., there exists a continued focus by these many organizations and their members on the need to expand the application of the fiduciary standard to all providers of financial and investment advice.

In fact, there exist nearly 100 consumer, financial planning, and investment adviser organizations who actively support the correct application of fiduciary standards. And, most importantly – they often work together to support issues involving the proper regulation of investment and financial advice, and to foster rules that will assist Americans in gaining greater retirement security.

A prime example of leadership can be found in the Certified Financial Planner Board of Standards, Inc.’s adoption of its “Fiduciary At All Times” new Code of Ethics and Standards of Conduct, effective October 1, 2019. In addition, the Investment Adviser Association, the National Association of Personal Financial Advisers (NAPFA), and the Financial Planning Association have all long advocated for fiduciary standards of conduct, devoting their resources to this activity.

Other professional groups promote and advocate for higher standards of conduct, such as the CFA Institute, the AICPA’s Personal Financial Planning division, the XY Planning Network, the Garrett Planning Network, the Alliance for Comprehensive Planners, The Committee for the Fiduciary Standard, and The Institute for the Fiduciary Standard. And consumer groups, led by the Consumer Federation of America, AARP, Better Markets, Americans for Financial Reform, the Public Investors Arbitration Bar Association ("PIABA"), and many, many others, support the principles of the fiduciary standard and their application for the benefit of all Americans, as well as the economic future of America itself.

Peer Review, State-Level CE, National Standards of Conduct, and Simplified Registrations

Yet, there exists a greater need to think, and to act, strategically. To be more proactive, rather than reactive. To be ready with proposals for legislation and rule-making at both the federal and state levels, in order to seize opportunities when they arise.

To this end, we must envision the “end game” – i.e., what the landscape would look like if we were successful in achieving a true profession. Yet, in creating and adopting such a vision, we must be realistic. What we may believe is ideal – for example, one national professional regulatory organization that establishes uniform, nationwide rules and requires but one registration for personal financial and investment advisers – is likely not in our future. We are not dealing with a blank slate, but rather with established federal and state regulators that will resist far-reaching new structures that would completely replace the status quo.

This leads me to think of what attributes we would like to see in “professional regulation.” These might include peer review, enhanced testing for entry into the profession, minimal educational standards including a four-year college degree, restrictions on the use of titles, a common set of professional standards of conduct, and continuing education requirements.

Peer review might be defined as “an organized effort whereby practicing professionals review the quality and appropriateness of services performed by their professional peers.” Peer review can be proactive in nature, such as that which exists for CPAs who perform audits, with the goal of increasing professional competence and adherence to standards. Or it can be reactive, such as might exist in disciplinary proceedings.

For this latter purpose, peer review might exist at two major points in a disciplinary proceeding against a professional personal financial/investment adviser. First, there may exist a “probable cause panel,” to ascertain whether a further investigation of an adviser’s activities is warranted, after a complaint is received. And peer review may exist as a means of final adjudication (subject to certain rights of appeal) of whether the adviser’s conduct violates professional standards of conduct.

In my view, both of these instances of peer review should be part of any profession we possess. We need to have our fellow professionals evaluate our conduct, rather than administrative law judges who may not fully understand what we actually do as professionals and the standards we strive to live by.

Another area in which professional involvement is altogether necessary and appropriate is the provision of continuing education. The delivery of personal financial advice requires, in most (but not all) instances, the attainment of a body of knowledge that is both very wide and very deep. And, that body of knowledge – as well all are well aware – often changes, with new laws (especially tax law changes), new types of products, and new investment strategies and planning techniques appearing often. In addition, variation in laws and regulations often occurs at the state level – with different income and transfer tax state and local laws, variations in consumer protection laws, different estate planning and estate/trust administration laws and procedures, distinct laws affecting asset protection techniques for both residents and non-residents, and much more.

I hope you see where there is leading. Due to the geographic dispersion of personal financial and investment advisers across the United States and its territories, the desire for peer review, and the need for state-specific continuing education, there exists the need to establish structures for the profession that lie, in part, at the state level.

Given the existence of state securities administrators (or the assumption of their functions in some states by state attorneys general or other agencies) in all 50 states, our longstanding principles of federalism, blue sky laws that go back to far before the enactment of the major securities laws of the 1930’s, and the focus of insurance market conduct regulation at the state level, it further makes sense to seek to append peer review onto existing state structures. State securities administrators, in particular, may welcome state legislation or regulation that provides them with expert assistance in evaluating the conduct of investment advisers and (in some states at present) financial planners, via a peer review process.

I can hear the chorus of those who seek one national professional regulatory organization, instead. Yet, I don’t believe such is achievable – at least not totally. We may be able to achieve certain functions of a national professional organization, however.

For example, it might be possible to have a “National Board of Standards” (similar, in some respects, to the Financial Accounting Standards Board) adopt professional standards of conduct (subject to input from state securities administrators, and subject to approval by the U.S. Securities and Exchange Commission.

Even then, however, states would be free to adopt higher standards (although, if a bona fide fiduciary standard of conduct is adopted, the impetus of the states to adopt higher standards is dramatically reduced). I, for one, am not willing to forestall a state’s ability to combat fraud upon its citizens. The importance of this, as a means of creating “regulatory competition” and avoiding “regulatory capture” cannot be overstated. For example, just recently we have seen the states begin to step up to the table with proposals to apply a fiduciary standard of conduct to the delivery of investment advice, as the S.E.C. has sought to eviscerate the distinctions between brokers and investment advisers.

We can also seek national legislation permitting registration of personal financial/investment adviser firms and their advisers in one state (i.e., the state of their primary office, or residence), with much simplified (and less expensive to undertake) “notice” filings to the other states. In essence, we can obtain many of the benefits of a national professional regulatory scheme, while maintaining the benefits obtained through peer review dispersed among the 50 states.

The Legal Battles

Another specific area some of our members may undertake contributions toward is legal research and advocacy as to what the law is, and should be, surrounding the fiduciary standard of conduct and its application. There are powerful forces that exist which seek to weaken fiduciary duties, and which seek to ensure that they are never correctly applied to the delivery of financial and investment advice. These forces need to be better countered via the development of sound legal reasoning to further underpin the application of the classical fiduciary standard of conduct upon financial and investment advisory activities.

Hence, we need to organize better to examine in detail the legal issues which have arisen. Our activities might include, but are not limited to, exploring the legal issues and concepts set forth below, and preparing legal memoranda to support the correct view. These issues include:

• Whether the classical fiduciary standard of conduct does, indeed, apply under the Advisers Act and under state common law, including the duties of no conflict, no profit, and undivided loyalty.

• Whether SEC vs. Capital Gainsdoes not, as some in the securities bar currently opine, hold that disclosure is all that is required when a conflict of interest is present.

• Whether estoppel and waiver possess limited application when fiduciary duties exist for investment/financial advisors (in contrast to the SEC’s apparent view on this point).

• Whether fiduciary status should be found for a broker, under state common law, who holds out as an “investment adviser” or any similar terms (i.e., any use of the adjectives “wealth,” “financial,” “investment,” etc. in conjunction with the nouns “planner,” “advisor,” “adviser,” “consultant,” or similar terms, or who advertises (or whose firm advertises) in a manner suggesting that a relationship of trust and confidence exists.

• Whether fiduciary status should be found when a broker promotes or advertises, in any fashion, that the broker acts in the “best interests” or “sole interests” or “interests” of the customer, or that a “client’s interests come first,” or “our brokers are committed to putting your investment needs and/or wants first”; or similar language, or when the broker promotes “financial advice” or “investment advice” as its service offering.

• Whether “special compensation” exists via the receipt of 12b-1 fees, or other continuing (other than de minimus) compensation paid to a broker over the course of a relationship with a customer.

• Whenever, when a dual registrant is in a fiduciary relationship with a customer as to one account, that fiduciary status extends to the entirety of the relationship between the dual registrant and the customer, and whether any switch from a fiduciary to a non-fiduciary relationship should be permitted only when such change is desired by the client and would be clearly beneficial for the client, given all of the facts and circumstances existing at the time.

• Whether to adopt an elicitation of the fiduciary standards of due care, loyalty, and utmost good faith, under state common law, that could be and should be applied when common law actions are brought for breach of fiduciary duties.

• Whether to, and how best to, educate policymakers on the limited effectiveness of disclosure as a means of consumer protection in the financial/investment advice field.

Earning the Right to Be a Profession: Efforts by Our Associations

All of us must also accelerate our efforts to earn the right to become a profession. This requires actions on many fronts.

For example, to pave the way for state-level peer review, our professional financial planning and/or investment adviser organizations may desire to form state-level entities, or at least state-wide chapters or councils. Such councils could engage in discussions with state lawmakers and regulators, with the goal of aiding in the addition of peer review upon existing regulatory structures. (Not always would peer review exist. For example, cases of outright fraud – such as theft of client funds, the sale of non-registered securities, etc. – probably don’t require peer review.) In addition, statewide councils could seek out educational programming specific to the laws of that state.

The CFP Board, with its new (effective 10/1/2019) Code of Ethics and Standards of Professional Conduct, and with its already well-formulated and established disciplinary procedures and processes, can take actions to further support the establishment of a profession. For example, peer review disciplinary proceedings might be structured at the state-wide level (or, in the interim, within various regions), to foster ease by CFP® professionals in attending disciplinary proceedings. Probable cause hearings could also be implemented, which may serve to reduce the actual number of full-fledged disciplinary proceedings. At the national level, the CFP Board can accumulate, organize, annotate, publish and then update a body of “case law” that reveal how the CFP Board’s new Standards of Conduct are applied, for the education of all personal financial advisors. And the CFP Board, together with other organizations, can continue to work to foster the academic body of knowledge that provides the foundation for any discipline.

The Financial Planning Association, perhaps in alignment with NAPFA, the AICPA/PFP, and the CFA Institute, may find a way to establish state-wide councils to foster continuing education that is state-specific. Such councils could also serve to provide support to, and connections with, policy makers in state legislatures and state agencies. While separately chartered state-wide organizations of personal financial advisors may be preferred, as an interim measure and for purposes of efficient operation more informal state-wide councils could exist, falling within the legal umbrella of one of the existing national organizations.

Lastly, we must strive to always improve upon the quality of the continuing education for personal financial and investment advisers. We should advocate for minimum CE standards for investment advisers. We must also substantially raise the standards for our own due diligence with respect to investment strategies, investment products, and the management of investment portfolios. Each and everyone one of us must strive to attain higher levels of knowledge and expertise, as we seek to earn the right to be called, collectively, a true profession.

Efforts by Individuals - They Matter a Great Deal

There are hundreds, and indeed thousands, of individuals who currently participate in advancing this emerging profession. However, we need to take our efforts to “the next level.” We need to oppose those who seek to weaken our standards – by “taking the gloves off.” We need to possess a collective vision for where we desire to be, and then work even harder to achieve that vision, in order to seize upon the future opportunities that will arise.

Each and every individual who cares about the future of our profession should utilize their own personal strengths – whether they lie in organizational leadership, education, advocacy, writing, media communications, or otherwise – to contribute to the accomplishment of a true profession. Contemplate how you can contribute – to your local chapter or society or study group, to your statewide organizations, and/or to your national organizations and their many committees and task forces. Find the way to increase your supporting efforts and activities during this coming year.

Acting together, with a common purpose, we can accelerate this vision coming true. For the sake of our fellow professionals. For the benefit of our clients. For the improvement of American society, improved capital formation and accumulation, and to foster U.S. economic growth. We can achieve a true profession of personal financial and investment advisers – for the benefit of America.

Ron A. Rhoades, JD, CFP® is the Director of the Personal Financial Planning Program at Western Kentucky University’s Gordon Ford College of Business. A professor of finance, tax and estate planning attorney, investment adviser, and Certified Financial Planner™, he has long written about application of fiduciary law as the delivery of financial planning and investment advice. This article represents his personal views, and are not necessarily the views of any institution, organization, nor firm with whom he may be associated.

Part 5 of a Series on the Regulation of Financial and Investment Advice, and on the Future of the Profession.

ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

Part V. Disclosure Requirements the S.E.C. Could Adopt - That Make Sense

Should the U.S. Securities and Exchange Commission desire to adopt a disclosure document, there is a far better form that could be utilized than that contained in Form CRS.

While disclosures are not the most effective means of consumer protection, the disclosure forms below would provide consumers with much more useful information. These forms of disclosure would more clearly provide consumers with information that permits them to understand the role their broker or investment adviser is in, and the duties owed (or not owed) to the consumer.

UNIFORM DISCLOSURE FORM FOR BROKER-DEALERS, REGISTERED REPRESENTATIVES, INVESTMENT ADVISERS, AND INVESTMENT ADVISER REPRESENTATIVES

a)     Whenever investment advice is provided to a client, then a uniform disclosure form (“UDF”) shall be completed and provided by the broker-dealer, agent or adviser to the client at the inception of the client relationship, and annually during each calendar year thereafter during the duration of the client relationship, which UDF shall be substantially in the form set forth below.

b)    The UDF shall be and remain as a separate document and shall remain apart from and distinct from any other contracts, agreements, or other disclosures made to the client. If delivered electronically to the client, notification of electronic delivery of the UDF shall refer to: “Important Annual Relationship Disclosure” in the subject heading of the communication and no other substantial information shall be provided to the client in such communication other than the UDF.

c)     Should any material modifications occur to the disclosures contained in the UDF previously provided to the client, more than 15 days prior to the annual re-delivery of the UDF, the broker-dealer and/or adviser shall modify the disclosures previously provided through a written amendment thereto. Such amendment need not be in the format of the UDF, provided that the material modifications are relatively minor.

d)    The agent and/or adviser shall ensure that the client has received and reasonably understands the disclosures provided in the UDF and any amendments thereto. The agent and/or adviser shall fully and completely answer any questions posed by clients which relate to the subject matter of the UDF.

e)     Completion and delivery of the UDF does not fulfill the entirety of the fiduciary or other duties owed to the client by the provider of investment advice.

f)      The UDF provided shall be in substantially the following format and with substantially the following content:

UNIFORM DISCLOSURE FORM TO INVESTMENT CONSUMERS WHO ARE IN RECEIPT OF INVESTMENT ADVICE FROM INVESTMENT ADVISERS OR BROKERS
Name of Broker-Dealer (Company) Providing Investment Advice:
Name of Investment Adviser (Firm) Providing Investment Advice:
Note to dual registrants: complete both the “broker-dealer” and “investment adviser” listings above.
1. IS YOUR INVESTMENT PORTFOLIO INVESTED “PRUDENTLY”? Is the Prudent Investor Rule applicable to all or the majority of your investment portfolio?
_____ YES (if checked) Assets, if any Excluded:	All or the majority of your investment portfolio upon which we, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), provide investment advice is advised upon and/or managed according to the dictates of the prudent investor rule, which requires that such portion of your investment portfolio be managed as a prudent professional would manage the portfolio, after considering your needs, goals, investment time horizon(s). In satisfying this standard, we are required to exercise due care, skill, and caution. In adherence to the prudent investor rule, we possess a duty to minimize idiosyncratic (diversifiable) risk, we are required to not waste your assets, and we possess other duties.
	While the majority of your portfolio is subject to the prudent investor rule, the following account(s) or investment assets are excluded from the application of the prudent investor rule:
_____ NO (if checked) Exceptions:	All or the majority of your investment portfolio upon which we, your broker-dealer firm (and agents thereof) and/or investment advisers (and representatives thereof), provide investment advice is NOT advised upon and/or managed according to the dictates of the prudent investor rule. As such, you understand that additional risks, fees and costs may exist within your investment portfolio which exceed those in a prudent portfolio.
	While the majority of your portfolio is NOT subject to the prudent investor rule, the prudent investor rule is applied by us to following account(s) or investment assets:

2. WHAT FORM OF INVESTMENT ADVICE IS PROVIDED TO YOU? Is the registered representative of your broker or the representative of your investment adviser an “independent adviser” or “restricted adviser” – or is “no advice” provided to you?
_______ Independent Adviser (if checked)		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), possess the ability to provide a sufficient range of relevant investment strategies and financial products available on the market which are sufficiently diverse with regard to their type and with regard to the number of issuers or product providers to ensure that your investment objectives can be appropriate met. As to any investment advice we provide to you, we are required to implement a due diligence process in which we compare a broad range of investment strategies and financial instruments.
_______ Restricted Adviser (if checked)		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), can only provide “restricted advice” (also called “non-independent advice”), for the following reasons (set forth the restrictions here):
________ No Advice Provided (if checked)		We, your broker-dealer firm (and registered representatives thereof), do not provide investment advice to you. We may describe the features and characteristics of a financial product or investment to you. We may not, however, advise you as to whether the financial product or investment is in your best interests or whether the financial product is the best product in the marketplace to seek you meet your needs and goals.
3. WHAT FORM OF RELATIONSHIP ARE YOU IN? Are you in a fiduciary-client relationship in which you are entitled to rely upon the investment advice you receive, or are you in an arms-length (seller-purchaser) relationship in which you must protect yourself?
________ A Fiduciary-Client Relationship Exists		We, your broker-dealer firm (and registered representatives thereof) and/or investment advisers (and representatives thereof), possess broad fiduciary duties to you in all aspects of our business relationship with you, including but not limited to: 1.    The duty to act with due care with regard to any financial or investment advice we provide to you, which means that we must act with the skill, prudent and diligence of an expert in providing financial or investment advice to you. 2.    The duty to act in your best interests, under the duty of loyalty, which includes the requirement to keep your interest paramount to our own interests, and that we act without regard to the financial or other interests of ourselves or our affiliated entities. 3.    The duty to be completely honest with you, with a high degree of candor. 4.    The duty to receive only reasonable compensation. 5.    The duty to not undertake any material misrepresentations of fact to you.
_______ A Seller-Purchaser, Arms-Length Relationship Exists		We, your broker-dealer firm (and agents thereof), are not acting as your fiduciary. In connection therewith: 1.    Our relationship with you is that of the seller of a financial product to you, the purchaser of that product. We are in an arms-length relationship with you. 2.    We may favor our own interests over yours. We are not legally required to act in your best interests. 3.    We do not possess a broad duty of due care with regard to our financial product recommendations to you. Any product we recommend to you need only be “suitable.”
FEES PAID DIRECTLY BY YOU
	Investment advisory fees paid directly by you based upon a percentage of the assets upon which advice is provided
	Investment advisory fees paid directly by you of a fixed or flat fee nature, paid either annually, quarterly, or monthly
	Investment advisory fees paid directly by you based upon hourly fees
	Investment advisory fees paid directly by you for discrete projects
FEES PAID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
	Sales commissions (including but not limited to front-end sales loads for mutual fund shares, and including but not limited to front-end commissions for annuities) resulting from sales or purchases of securities, other investments, or annuity/insurance products to you
	Sales commissions in the form of deferred contingent sales charges or back-end loads resulting from selling or purchasing securities, other investments, or annuity/insurance products to or from you
	Mark-ups and mark-downs in connection with principal trading of securities (i.e., where the broker-dealer firm purchases securities directly from you, or sells securities directly to you, from the broker-dealer’s own accounts)
	For any securities sold to you, compensation derived from the issuer or stocks, bonds, or other securities relating to the investment underwriting activities of the broker-dealer
	12b-1 fees paid by mutual funds to your brokerage firm, which fees last indefinitely as long as you own the fund, regardless of whether you continue to receive investment advice from us
	12b-1 fees paid by mutual funds to your brokerage firm, which fees will last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice
	Other than 12b-1 fees, any other form of fees or trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last indefinitely as long as you own the security, other investment, or annuity/insurance product, regardless of whether you continue to receive investment advice from us
	Other than 12b-1 fees, any other form of trailing commissions paid to your brokerage firm resulting from the sale of securities, other investments, or annuity/insurance products to you, which fees or trailing commissions last for only a fixed period of time before they disappear, but which fees may continue during that period of time, regardless of whether you continue to receive investment advice from us
	Payment for shelf space received by your broker-dealer. (A shelf-space agreement occurs when a mutual fund pays this additional compensation in exchange for the broker-dealer preferentially marketing the shares of that mutual fund.)

(-cont.)  FEES AID BY PRODUCT MANUFACTURERS OR OTHER INTERMEDIARIES
	Marketing support payments paid by product manufacturers or intermediaries to your broker-dealer or investment adviser arising from the sales of securities or annuity/insurance products to you
	Other revenue sharing payments paid by product manufacturers to your broker-dealer or investment adviser
	Fees and/or commissions resulting from sales of securities for which your broker-dealer acts as underwriter or as part of an underwriting group
	Any other fees and/or commissions received for referrals by your broker-dealer firm of you to any other product or service provider that are not set forth above
	Receipt by your broker-dealer of payments for order flow from other brokerage firms (including but not limited to market makers) (these compensation payments benefit a brokerage firm for directing orders to different parties for trade execution)
	Receipt by your brokerage firm of soft dollar compensation received from managed accounts (including but not limited to mutual funds). Note that Section 28(e) of the (federal) Securities Exchange Act of 1934 discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of his having caused an account to pay more than the lowest available commission if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the brokerage and research services provided.
	Other than as previously described, any receipt by your broker or investment adviser of access to software, research, trading software, practice management and/or investment education (though attendance at conference, via webinars, written materials, or otherwise), or other support services from any other brokerage firm, custodian, or product manufacturer.
	Any other forms of revenue sharing or other payments, paid by product manufacturers or intermediaries, to your broker-dealer or investment adviser arising from the sales of securities, other investments, or annuity/insurance products to you, other than as previously described: (Broker-dealer and/or investment adviser: adequately describe such forms of revenue sharing or other payment arrangements, in the space set forth below):

Ron A. Rhoades, JD, CFP® is the Director of the nationally recognized Personal Financial Planning Program at Western Kentucky University’s Gordon Ford College of Business. A professor of finance, tax and estate planning attorney, investment adviser, and Certified Financial Planner™, he has long written about application of fiduciary law as the delivery of financial planning and investment advice. This article represents his personal views, and are not necessarily the views of any institution, organization, nor firm with whom he may be associated.