Moderator: Christine Lazaro, Supervising
Attorney, Securities Arbitration Clinic, St. John’s School of
Law
Ryan K. Bakhtiari, Partner, Aidikoff, Uhl &
Bakhtiari [Abstract forthcoming]
Mercer E. Bullard, Professor, University of Mississippi
School of Law
Discussions of retail investment adviser regulation generally focus
on how substantive conduct standards affect the providing of
investment advice. For example, the fiduciary standard’s
requirement that material conflicts of interest be fully disclosed
is discussed in terms of what conflicts must be disclosed and in
what level of detail, and the costs to financial professionals and
benefits to investors of such disclosure. This perspective is
reflected in the Dodd-Frank Act’s authorization of fiduciary
rulemaking by the SEC, and the SEC’s recent study on the regulation
of broker-dealers and investment advisers, both of which focus on
substantive conduct standards under a fiduciary duty.
Yet the importance of the fiduciary duty is highly contextual.
The capacity of substantive conduct standards to achieve their
purpose may depend on other factors including, inter alia: the
limiting of “investment advice” to advice regarding securities (as
opposed, for example, to insurance and banking products), the
private venues that are available to enforce this right
(e.g., arbitration, or state or federal court), the
conduct standards imposed under non-securities regulatory regimes
(e.g., ERISA for employee benefit plans, state insurance
law for insurance products), the powers and jurisdiction of
applicable regulators (e.g., SEC v. FINRA v. states;
enforcement v. rulemaking), and the regulation of issuers and
intermediaries (e.g., mutual fund disclosure and broker
sales practices). The contextual nature of the fiduciary is the
subject of a previous paper (Mercer Bullard, The Fiduciary
Study: A Triumph of Substance Over Form, 30 B.U. REV. BANKING
FIN. L. 171 (2011)).
This paper will take the next step by identifying legal reforms
that are proximately related to achieving the goals of the
fiduciary duty. Some of these reforms may be necessary for the
fiduciary duty to achieve its purpose (e.g., written
arbitration opinions). Or they may be alternatives that can further
this purpose with or without the adoption of a fiduciary duty
(e.g., private claims for suitability violations;
rulemaking on specific conduct issues; FINRA or DOL rulemaking; SEC
enforcement actions). Thus, the paper will attempt to frame a
holistic approach to retail investor protection that places the
fiduciary duty in the context of the diverse legal mechanisms that
make up the sources of law that regulate retail investment
advice.
Andrew J. Melnick, Partner, Schindler Cohen &
Hochman LLP [Abstract forthcoming]
Paul R. Walsh, Vice President, Assistant GC &
Compliance Director, JP Morgan Chase
Can the Retail Investor Survive the Fiduciary
Standard?
By: Paul R. Walsh & David W. Johns
The financial collapse of the late 2000’s has undoubtedly
changed the landscape of the securities industry, resulting in a
populist push towards more regulation. One proposal on the table is
the imposition of a consistent and uniform fiduciary standard for
all investment recommendations, regardless of whether the
recommendation is made by an investment adviser or a broker-dealer.
Historically, broker-dealers were exempted from the limiting
provisions of the Investment Advisers Act where the transaction
occurred in a fee-based account and where certain conditions were
met. The logic was that the services provided in a fee-based
account differed from those in an account managed by an investment
adviser.
However, Financial Planning Association v. SEC
overruled this approach. In that case, the U.S. Court of Appeals
for the Washington, D.C. Circuit eliminated the exemption the SEC
had created for fee-based accounts. After this case, if a broker
offered a client a fee-based account, he had to be registered as an
investment adviser, eliminating any difference in the statutory
standards that apply to broker-dealers and investment advisers if
the broker-dealers were providing fee-based accounts. The SEC in
its recommendation under the Dodd-Frank Act to merge the two
standards of care embraced a position that would eliminate any
distinction between broker-dealers and investment advisers. Both
would now have to act in the best interest of the customer.
If adopted, the impact on broker-dealers cannot be understated. The
current broker-dealer commission compensation per transaction model
would change to pay for the additional costs to meet the fiduciary
obligations. The change would be towards an assets under management
fee structure that currently exists for investment advisers. This
would raise the costs of obtaining investment recommendations and
limit access to professional advice for the small retail investor.
In the end, such action is not the answer. Rather, the SEC should
push for continued regulation of more disclosure and transparency
in the investment sales process, better education of the public in
handling their own money, and swifter punishment of violators of
existing rules.