A New Fiduciary Standard

The SEC has been mulling over a new fiduciary duty rule, which it was granted the authority to issue by Section 913 of the Dodd-Frank Act. The rule is on the agenda for 2014, but has been a lively enough topic of discussion that many are uncertain as to when an actual rule could be brought forth. There are already blockades being put in place against the new rule: this past Wednesday, the House passed a budget that would bar the SEC from imposing the new standard in the next federal fiscal year. The budget is now before the Senate. The situation is further complicated by the fact that the Department of Labor is planning to re-propose its own standard in August of this year, a move which would expand the definition of fiduciary under ERISA to include 401(k) and IRA providers.

Dodd-Frank charged the SEC with this task as a result of inconsistency in federal securities laws; broker-dealers are regulated under the Securities and Exchange Act of 1934, while investment advisers operate under the Investment Advisers Act of 1940. Over the decades since these laws were enacted, broker-dealers have begun to offer, emphasize, and market their capacity to provide investment and retirement planning services, which were traditionally the domain of investment advisers.

Currently, broker-dealers are only beholden to the suitability standard, while investment advisers must adhere to the more stringent fiduciary duty standard that requires they act in the best interests of their client and fully disclose any conflicts of interest. 

Investors often fail to understand the difference between broker-dealers and investment advisers. Indeed, broker-dealers may even market themselves as financial advisers, further blurring the distinction in the mind of the public. As a result, investors may be unaware of the guidelines their chosen adviser is obliged to follow. Converging the two standards, and avoiding the resulting confusion for retail investors, is what the SEC was tasked with under Dodd-Frank.

The particular manner in which this goal is carried out, as well as the enactment of other provisions within Dodd-Frank, is an ongoing debate between the financial industry and regulators. By the end of 2014, we should have at least some indication of what the new standard for broker-dealers and investment advisers will be.