Speaking at a recent seminar of the Securities Industry and Financial Markets Association in Phoenix, Mary Jo White, Chairwoman of the Securities and Exchange Commission (“SEC”), expressed her personal view that the agency should act to implement “uniform fiduciary” standards among broker-dealers and investment advisers.
If implemented, both broker-dealers and investment advisers in the United States would be required to adhere to the highest standard of care known in equity and common law. If recognized as being in a fiduciary relationship, the fiduciary must act in the best interest of the beneficiary and must not use his or her position to further any self-interest.
The American Regulatory Landscape
American service providers are currently not subject to a consistent standard in dealings with their clients. In the U.S., the Investment Advisers Act of 1940 requires investment advisers to adhere to statutory fiduciary standards. In contrast, broker-dealers – individuals who are licensed to sell securities but are not authorized to give investment advice – are subject to a less stringent “suitability” standard, under which they must have a reasonable basis for believing that an investment or strategy is suitable based on the information they obtain through reasonable diligence.
Pursuant to section 913 of the Dodd-Frank Act, the SEC undertook a study of whether a uniform fiduciary standard should be applied to both broker-dealers and investment advisers. The SEC’s Study on Investment Advisers and Broker-Dealers was released in January 2011 and recommended that the agency proceed with rulemaking to adopt a uniform fiduciary standard for brokers and investment advisers when providing personalized investment advice to retail consumers.
Facing pressure from consumer advocates, lawmakers and industry groups, it appears that the SEC is finally moving on that front. Speaking to industry stakeholders, White said: “my own personal view, which I think you share and many others share, is that the SEC should act under Section 913 of Dodd-Frank to implement a uniform fiduciary duty for broker-dealers and investment advisers”. However, White noted that there would be complexity with such rulemaking, including “how do you define that standard; what’s required under that standard; and how do you ensure compliance and enforcement of that standard”. She also added that her view “going in” is that such rulemaking should be a “codified principles-based standard rooted in the current fiduciary standard for investment advisors.”
The Canadian Regulatory Landscape
In Canadian provinces other than Quebec, investment professionals are not subject to a statutory “fiduciary” standard. Rather, investment professionals are to observe high standards of ethics and conduct in the transaction of their business, not engage in any business conduct or practice which is unbecoming or detrimental to the public interest, and be of such character and business repute as is consistent with the standards of the rule (see IIROC Dealer Member Rule 29.1). Part 13 of National Instrument 31-103 also sets out regulatory standards for “know your client”, suitability, conflict of interests, loans and margin, and complaints. Sometimes that standard has been interpreted as requiring investment professionals to meet fiduciary-like standards, but that tends to depend on the particular circumstance of each case and is far from a consistently recognized norm.
In recent years, a vigorous debate has developed as to whether legislative amendments are required to put Canada on par with the U.S. In October 25, 2012, the Canadian Securities Administrators (“CSA”) released Consultation Paper 33-403 in order to provide “a forum for stakeholder consultation of the desirability and feasibility of introducing a statutory best interest duty.” After canvassing regulatory developments in Australia, the U.S., the UK and the E.U., the Consultation Paper proposed for comment the following qualified statutory fiduciary standard (also referred to as the “best interest” standard):
Every adviser and dealer (and each of their representatives) that provides advice to a retail client with respect to investing in, buying or selling securities or derivatives shall, when providing such advice,
- act in the best interests of the retail client, and
- exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstances.
The Consultation Paper also delineated the statutory fiduciary standard as follows:
- a "retail client" would include individuals that have net financial assets of $5 million or less and companies that have net assets of less than $25 million;
- a retail client would retain complete discretion whether to follow any advice received;
- the duty would apply only when an adviser or dealer gives advice to a retail investor with respect to investing in securities;
- the duty would be on-going and would terminate upon the termination of the client relationship;
- the best interest standard could not be waived by a retail client as a contractual matter if advice is given to that client;
- a retail client would be entitled to enforce the best interest standard as a private law right of action while a non-client may still pursue a private law right of action; and
- the existing suitability requirement would continue to apply to advisers and dealers.
After three consultation rounds in 2013, the CSA published an update. Two camps of thought emerged. On the one hand, proponents argue that the existing regulatory framework does not adequately protect investors and that the introduction of a statutory fiduciary standard, following other common law jurisdictions, would better protect retail investors. On the other hand, opponents argue that existing rules and regulations provide adequate safeguards, and that increased legal uncertainties and liability exposure would result in advice that is more expensive, less accessible and too conservative. Differences aside, there is a general consensus that a statutory fiduciary standard, if adopted, should be as clear as possible and should include sufficient guidance to ensure all stakeholders understand how to comply with the standard.
As it stands, further debate and action on this issue appears generally to be on hold pending full implementation of Customer Relationship Model Phase II (or “CRM2”). CRM2 will overhaul the existing relationship between client and investment professionals, requiring investment dealers to report personalized performance, charges and commissions annually to each client, and is widely seen as a significant change within an industry which is increasingly concerned about the growing costs of compliance. Whether the debate will be revived by any development south of the border remains to be seen.