Congress Mulls Stricter Standards for Brokers

By Humberto Cruz

As Congress considers extending the fiduciary standard to brokers - in essence, requiring them to put clients' interests first - consumer and investor advocates, regulators, professional groups and prominent advisers are urging its adoption and trying to prevent attempts to water the standard down.

Good for them.

"Over the years, full-service brokers have been allowed to portray themselves to the public as 'financial advisers'...all without having to act in their clients' best interests, which is the true hallmark of an advisory relationship," said Barbara Roper, director of investor protection for the Consumer Federation of America.

Roper and six other persons, each representing a different organization, sent a letter to Barney Frank, chairman of the House Financial Services Committee, and Spencer Bachus, the committee's ranking member, supporting but also seeking to strengthen a proposal by the Obama administration to extend the fiduciary standard to broker-dealers. Other signers represent the Certified Financial Planner Board of Standards, the Financial Planning Association, Fund Democracy, the Investment Adviser Association, the National Association of Personal Financial Advisors and the North American Securities Administrators Association.

The administration's proposal authorizes - but does not obligate - the Securities and Exchange Commission to require that all brokers, dealers and investment advisers, when providing advice about securities to retail customers, "act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice."

The proposed legislation "represents a good starting point," the letter to Frank and Bachus says. But it calls for revisions to "unambiguously provide" for the extension of the fiduciary duty to brokers without "in any way" undermining current fiduciary requirements of registered investment advisers.

These advisers, who are regulated by the SEC and/or individual states, are already legally bound to put clients' interests first. Brokers or "registered representatives," who fall under the jurisdiction of the Financial Industry Regulatory Authority, face a less stringent "suitability" standard. They can recommend investments that generate higher commissions and may not be expected to perform as well as others, as long as the investment is "suitable," which as a practical matter means the investment fits within a client's goals and risk tolerance.

"Few investors understand the stark differences" between the suitability and fiduciary standards, said Knut A. Rostad, a member of the Committee for the Fiduciary Standard, yet another group of 12 prominent investment advisers urging investors to sign an online petition and letter to Congress.

"Wall Street needs real reform," reads the petition, available at http://www.thepetitionsite.com/1/make-wall-street-put-investors-best-interest-first. It asks that any new laws or regulations extending the fiduciary standard to brokers "meet the requirements of the authentic fiduciary standard" consisting of five "core fiduciary principles."

They are:

-- Put the client's best interests first.

-- Act with prudence; that is, with the skill, care, diligence and good judgment of a professional.

-- Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts.

-- Avoid conflicts of interest, and

-- Fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

Adoption and enforcement of the strict fiduciary standard for brokers would help reverse the current "horrible" level of distrust by the public of the financial services industry, said Rostad, regulatory and compliance officer at Rembert Pendleton Jackson in Falls Church, Va. Matthew D. Hutcheson, committee member and president of Independent Pension Fiduciary in Portland, Ore., said the advisers' group strongly opposes an alternate proposal to simply combine broker or adviser rules into a less strict standard.

So should all investors.

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