“Upon Further Review: Do We Already Have a Universal Fiduciary Standard?” Redux

Back in 2013 I posted an article dealing with the controversy over the DOL’s proposed fiduciary standard. In that article, I suggested that a universal fiduciary standard was already in place that applied to stockbrokers, investment advisers and anyone else providing investment advice to the public. A significant portion of the DOL’s rule has now become effective, with the remainder scheduled to become effect the first part of 2018.

And yet the efforts to repeal the DOL’s fiduciary standard continue. Members of the Trump administration, Congress, new DOL Secretary Acosta and new SEC Chairman Cutler have all expressed opposition to the rule. So again, I sit back and shake my head and re-ask my original question – Is this whole debate over a universal fiduciary standard actually a moot point?

While I am a staunch advocate for a clear, unmistakable universal fiduciary standard so that there is no question about the duties every financial adviser owes a customer, I would suggest that anyone who provides financial and investment advice to the public is subject to the fiduciary standard’s “best interest” requirement.

There are basically four ways that an adviser acquires fiduciary status: by contract or express agreement; by state common laws and/or regulatory rules; by control over a discretionary account; and by having de facto control over a non-discretionary account. Fiduciary status based upon contract is fairly obvious. However, financial advisors may not be as familiar with the other three methods of acquiring fiduciary status.

Registered investment advisers and their representatives are fiduciaries pursuant to the Investment Advisers Act of 1940 (’40 Act). IA-1092 clearly establishes that those holding themselves out as financial planners and/or offering to provide financial planning services to the public are fiduciaries. Stockbrokers who manage customer accounts on a discretionary basis are fiduciaries. The argument has always centered on the applicable standard for stockbrokers involved with non-discretionary customer accounts.

Broker-dealers and stockbrokers are quick to point out that they are not covered under the ‘40 Act and therefore are generally not subject to the fiduciary standard’s “best interest” A closer look at rules, regulations and court decisions suggest that broker-dealers and stockbrokers may be operating under a false sense of security.

An argument definitely can be made that under FINRA’s suitability rule, Rule 2111, all stockbrokers must adhere to the fiduciary standards and always put their customers’ best interests first ahead of their own financial interests. Rule 2111 was introduced in FINRA Regulatory Notice 11-02, with subsequent notices of guidance in FINRA Regulatory Notice 11-25 and FINRA Regulatory Notice 12-25.

While Rule 2111 was designated as a rule on suitability, many readers took particular notice of footnote 11. Footnote 11 is significant in that it referenced previous enforcement and disciplinary proceedings which addressed a stockbroker’s duties in terms of a customer’s “best interests,” more specifically that “a broker’s recommendations must be consistent with the customer’s best interests” and “a broker’s recommendations must serve his client’s best interests.”(1)

The references to a customer’s “best interests” raised immediate questions among many given its similarity to the fiduciary duty of loyalty set out in both the Restatement of Trusts and the Employees’ Retirement Income Security Act (ERISA). The current debate over a universal fiduciary standard is due in large part over the fact that the “suitability” so often referred to as the applicable standard for stockbroker does not require that recommendations provided to customers necessarily be in their “best interests.”

To its credit, FINRA did not backtrack from its position that broker’s recommendations have to be in a customer’s best interests. FINRA responded by noting that the position had been clearly stated in numerous cases and that the “best interests” requirement “prohibits a broker from placing his or her interests ahead of the broker’s interests.”(2)

You make your own decision, but the prohibition against the broker putting his or her interests before those of a customer sound very familiar to language requiring that a ERISA fiduciary always put a client’s interests first, with “an eye single to the interests of the participants and the beneficiaries,”(3) with ERISA’s requirement that a fiduciary act “solely and exclusively” for the benefit of the plan’s participants and beneficiaries(4) , and the Restatement of Trusts’ requirement, in compliance with the fiduciary duty of loyalty, that a fiduciary act solely in the interests of the beneficiaries.(5)

The courts look at various factors in determining whether an adviser had de facto control over an account justifying the imposition of the fiduciary standard on an adviser. As the courts have stated,

[t]he touchstone is whether or not the customer has the intelligence and understanding to evaluate the broker’s recommendations and to reject one when he thinks it unsuitable.(6)

the issue is whether or not the customer, based on the information available to him and his ability to interpret it, can independently evaluate his broker’s suggestions.(7)

If the answer to these questions is in the negative, then the likelihood is that the adviser will be deemed to have had de facto over the customer’s account and they will be held to a fiduciary standard in their dealings with the customer and the account.

So the common argument against a universal fiduciary standard, namely that it would result in higher costs for customer’s, makes no sense since requiring all stockbrokers to put a customer’s interests first is arguably already the applicable standard. Enacting a universal fiduciary standard would simply be a codification of the applicable standard for both registered investment advisers, brokers and anyone else purporting to provide investment advice to the public.

From the public’s perspective, a universal fiduciary standard would eliminate the confusion which obviously exists regarding what duties are owed by one’s financial/investment adviser and better protect the public in their dealings with investment professionals, both of which are consistent with the mission statements of both the Department of Labor and the Securities and Exchange Commission.

So, in response to my original question, there is nothing onerous or unfair about requiring that anyone that provides financial or investment advice to the public must always put the public’s interest ahead of their own financial interests? In fact, that is actually the current standard for both registered investment advisers and stockbrokers.

So if either the Department of Labor and/or the Securities and Exchange Commission refuse to adopt a universal fiduciary standard in order to better protect the public, the public has a right to know the true reason for not doing so. Americans are getting tired of the continuous cover-ups and misinformation, the partisan politics that deny the public the protection they need.

As the court recognized in Archer v. Securities and Exchange Commission,

[t]he business of trading in securities is one in which opportunities for dishonesty are of constant recurrence and ever-present. It engages acute, active minds trained to quick apprehension, decision and action. The Congress has seen fit to regulate this business.(8)

The mission statements of both the Department of Labor and the Securities and Exchange Commission recognize a similar duty to protect the public with regard to investment related activities that impact investors and employees. Therefore, the failure of either agency to pass a universal fiduciary standard in order to provide the public with a simple, yet meaningful, expression of their rights and protections in their dealings with financial/investment advisers will be yet another in a growing list of government breaches of the public’s trust.

3. DiFelice v. U.S. Airways, 497 F.3d 410 (4th Cir. 2007)
4. 29 U.S.C.A. Sections 1104(a)(1), (a)(1)(A)(i), and (a)(1)(A)(ii)
5. Restatement (Third) Trusts, Section 78 (Duty of Loyalty)
6. Follansbee v. Davis, Skaggs & Co., Inc., 681 F.2d 673, 677 (9th Cir. 1982)
7. Carras v. Burns, 516 F.2d 251, 258-59 (4th Cir. 1975)
8. 8. Archer v. Securities and Exchange Commission, 133 F.2d 795, 803 (8th Cir. 1943)

Copyright © 2017 The Watkins Law Firm. All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.



About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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1 Response to “Upon Further Review: Do We Already Have a Universal Fiduciary Standard?” Redux

  1. Pingback: May It Please the Court: Justice Denied As Courts Miss the Forest for the Trees in ERISA Actions | The Prudent Investment Fiduciary Rules

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