Skip to content

Let’s Be Clear…

All of a sudden, unexpectedly, SEC chairperson Mary Jo White has switched from describing a harmonized fiduciary standard as a back-burner issue to something that is white hot on her agenda. This has happened at a time when the fiduciary advisory profession–which lobbied that a fiduciary standard be imposed on all who hold themselves out as investment advisors–is cooling on the harmonization idea. Fiduciary advisors are beginning to realize that, after a lot of brokerage industry lobbying, a "harmonized" fiduciary standard is unlikely to be a stringent one, and in fact might rewrite the whole idea of fiduciary from a rock-solid commitment to the client's best interests to an obligation that can be artfully disclosed away by organizations that systematically embrace conflicts of interest and routinely profit from them.

This creates an interesting dynamic: the group that was once championing the uniform standard is now backtracking, while the group that once opposed the idea is now pushing it hard–and the brokerage firms are almost certainly behind Chairperson White's newfound zeal for harmonization rulemaking. You will hear that this is an example of dilatory practices and inconsistency on the part of advisors (What; you were for them, but now that they're coming to pass, you're against them?), and so I think the profession needs to recognize the arguments we will hear from the opposition lobbyists and be clear about why we're switching gears.

Why ARE we? I think the clearest and simplest thing we can say is that we are forever consistent on one thing: we champion and support any initiative that will benefit consumers, and oppose any initiative that risks harming them. If you look at our positions through this framework, they are utterly consistent. We lobbied for a strong fiduciary standard that would give consumers meaningful protection against predatory sales practices and business models built fundamentally on exploiting hidden conflicts of interest. The uniform fiduciary standard that we lobbied for would require anyone holding him/herself out as a professional advisor to act in a fiduciary capacity when giving advice to consumers. We have never understood why brokers, who provide financial advice, should be exempted from registering as registered investment advisors subject to SEC oversight.

We are now lobbying against harmonization because it has become clear that what the SEC intends is far from what we have been asking for. Instead, we expect this rulemaking to define "fiduciary" in a way that is contrary to decades of common law and millennia of popular understanding: we anticipate a compromise between a clear obligation to the consumer, on the one hand, and on the other: a business model that does not put the consumer's interest first as a matter of business routine.

The current situation–where brokers can call themselves advisors and masquerade as objective, consumer-loyal agents–is far from ideal, and we had hoped to change that. But this current situation is actually preferable to a world where brokers will also be able to describe themselves as fiduciaries while, at the same time, disclosing away their fiduciary obligations and further obscure the difference between an advisor who is loyal to the client and an advisor who is giving advice that maximizes the profits of his/her employer. We had hoped to lobby for a better world, but the money and influence of the brokerage world managed to turn our proposal into potentially a worse one.

We continue to promote our original position; there is nothing inconsistent about that. We believe that it is common sense and good regulatory policy to require brokers who hold themselves out as advisors to be held to a fiduciary standard and register as registered investment advisors–subject to all the obligations that imposes. If they want to dress in sheep's clothing, then we should require them to act at all times as sheep, not as wolves who look somewhat like sheep.

We oppose the idea that the wolves can, through some harmonization rulemaking, be allowed to look even more like sheep than they do today, without giving up their predatory agenda. There is nothing inconsistent about that. If the SEC chairperson and staff are having trouble seeing the difference, then perhaps this, prima facie, is evidence that the Wall Street lobbyists have managed to cloud their clarity and understanding of how the financial markets currently operate. The SEC, after all, regulates investment advisors, and should well understand the differences in their behavior and requirements from those who are not obligated to fall under SEC regulation. If the SEC thinks it is a great idea to compromise the solid, ages-old concept of "fiduciary" in order to accommodate what is fundamentally a sales-driven business model, then we would at the very least ask that it recognize that this is far from what we originally, currently and consistently have been asking for on behalf of financial consumers.

And if anyone argues that this is a dilatory or inconsistent argument, we ask that they agree to implement the uniform fiduciary standard that we originally requested and lobbied for. Our goal is to help the SEC implement rulemaking that will protect consumers, and the rulemaking that the brokerage industry has twisted our original proposal into is very far from accomplishing that important goal.