Fiduciary standard

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Congressional efforts

How Dodd-Frank may change the way broker-dealers conduct business

On July 15, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd- Frank Act"). Although much attention has been focused on how the Dodd-Frank Act will affect banks, it also has significant implications for broker-dealers. In particular, the Dodd-Frank Act takes a giant step towards imposing a fiduciary duty upon broker-dealers when they conduct business with retail customers. While the Dodd-Frank Act does not immediately impose a fiduciary standard on broker-dealers, it empowers the SEC to do so. SEC Chairman Mary Schapiro stated in a speech on July 9 that "I have long advocated such a uniform fiduciary standard and I am pleased the legislation would provide us with the rulemaking authority necessary to implement it."1

Background

Historically, broker-dealers have generally not been considered "fiduciaries," even when dealing with retail customers. Investment advisers, on the other hand, are considered "fiduciaries" and already have an obligation to act in their customers' best interests. The SEC has notified investment advisers that they:

"have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients' best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client..."2

Because broker-dealers are excluded from the definition of "investment adviser" unless they charge separately for their advice, broker-dealers are not required to comply with these "fiduciary" standards. The standards of conduct currently applicable to broker-dealers derive from many sources, including agency law, the "shingle" theory, antifraud provisions of the securities laws and the rules and regulations of the SEC and self-regulatory organizations such as FINRA. Broker-dealers have a duty of fair dealing, duty of best execution, suitability requirements and various disclosure requirements. While such duties and requirements provide some degree of investor protection, they fall short of the "fiduciary" standards described by the SEC.

Provisions in the Dodd-Frank Act

The Dodd-Frank Act represents a compromise between the House bill, which would have eliminated the exclusion for broker-dealers from the definition of investment advisers, and the Senate bill, which called for further study of the issue. While the Dodd-Frank Act does not impose a fiduciary duty, it includes a number of measures that will likely hasten the day when some form of fiduciary duty will be imposed upon broker-dealers. Section 913 of the Dodd-Frank Act:

  • Requires the SEC to undertake a study and issue a report to Congress within six (6) months regarding the effectiveness of existing legal and regulatory standards of care for brokers, dealers, investment advisers, and associated persons who provide personalized investment advice to and recommendations about securities to retail customers.
  • Authorizes the SEC to commence rulemaking based on the findings of its study.
  • Empowers the SEC to adopt rules now that would require broker-dealers to comply with the standards of conduct applicable to investment advisers when providing personalized investment advice about securities to retail customers.
  • Empowers the SEC to adopt rules now requiring broker-dealers to notify retail customers and obtain their acknowledgement or consent when the broker-dealer provides only a limited range of investment products.
  • Directs the SEC to facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest.
  • Directs the SEC to promulgate rules prohibiting or restricting sales practices, conflicts of interest and compensation schemes for broker-dealers and investment advisers that the SEC deems contrary to the public interest and the protection of investors.
  • Amends the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to provide the SEC with authority to bring enforcement actions against broker-dealers or investment advisers in respect of personalized investment advice provided to retail customers using the standards of conduct applicable under either Act.
  • The Dodd-Frank Act defines "retail customer" as a natural person, or the legal representative of such a person, who receives personalized investment advice about securities from a broker or dealer or investment advisor and who uses such advice primarily for personal, family, or household purposes.

While the Dodd-Frank Act stopped short of delineating a "fiduciary" standard for broker-dealers, it clearly points in the direction of imposing such a duty, albeit one which may be modified from common law concepts of fiduciary duty. In that regard, the Dodd-Frank Act appears to contemplate that at least some conflicts of interest between broker-dealers and their clients may be resolved through disclosure and consent. Moreover, the Dodd- Frank Act specifically states that commission-based compensation and offering a limited range of products will not, in and of themselves, be deemed a breach of a broker-dealer's duty of care to retail customers. In addition, the Dodd-Frank Act provides that broker-dealers will not be deemed to have a continuing duty of care or loyalty to the retail customer after providing personalized investment advice about securities.

Potential Impact on Broker-Dealer Business Practices

As the SEC undertakes its study and considers potential new rules and standards, it may be prudent to consider how imposition of a "fiduciary" standard on broker-dealers could impact certain practices.

Trading with a Retail Customer on a Principal Basis

Broker-dealers may act as agents or principals in their dealings with customers. While they currently must disclose the capacity in which they are acting, when trading as a principal they are generally not required to disclose their mark-up (except for riskless principal transactions and situations where the broker has a fiduciary relationship with the client). Will a new fiduciary standard require retail customers to provide a written consent before the broker-dealer may trade on a principal basis (as is currently the case with investment advisers)? Will disclosure of mark-ups be required? Will the broker-dealer have to provide other disclosures regarding its economic "stake" in the securities to be purchased or sold on a principal basis in order to discharge its duty?

Offering Proprietary Products

Broker-dealers offering proprietary products of the firm or its affiliates might be required to provide notice to each retail customer and obtain the consent or the acknowledgement of the retail customer. Will such notice need to explain to the retail customer any additional incentives that the broker-dealer's registered representatives may have to sell proprietary products? How much detail in this regard would be necessary to discharge a fiduciary obligation?

Making Recommendations to Retail Customers

While broker-dealers currently must ensure that any recommendations they make are suitable for the customer, there is a potential gap between what is "suitable" and what is "in the best interests" of the client. How will a broker-dealer determine what is in the best interests of the client? Will more extensive background information and more frequent consultations be required to meet this standard? Is a "best interests" standard realistic where the broker-dealer has a limited mandate and is one of many securities professionals working with the client?

Initial Public Offerings

When pricing an initial public offering, underwriters generally try to establish a price that balances the interests of the issuer and the purchasers in the IPO. In undertaking this process, investment bankers are traditionally viewed as independent actors who are not operating under any fiduciary duty. In fact, underwriting agreements typically include a disclaimer of any fiduciary duty to the issuer, in part to address the decision of the New York Court of Appeal in the eToys case. Imposition of a fiduciary duty for dealings with retail customers may complicate an underwriter's ability to strike a fair balance between the issuer and the purchasers, perhaps leading to the exclusion of retail customers from participating in IPOs.

Preference of Certain Customers over Others

If a broker-dealer makes an attractive investment opportunity available to certain customers, but not to others who might have an interest, would the broker be violating a duty of loyalty to the excluded clients?

Conclusions

Unless and until the SEC exercises its rulemaking authority, the impact of the Dodd-Frank Act on broker-dealers will remain unclear. Any new rules promulgated by the SEC are likely to have a significant effect on broker-dealers who have retail clients and the rulemaking process should be closely monitored.

House and Senate compromise on "standard of care"

The current regulatory regime treats brokers and advisers differently and subjects them to different standards of care even though the services they provide investors are very similar and investors view their roles as essentially the same. This regime was established during the New Deal and, although amended many times since, remains rooted in the last century. An ultimate goal of financial regulatory reform has been to allow the SEC to align duties for financial intermediaries across financial products. A corollary of this goal is that standards of care for all brokers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers.

The House bill would have imposed a uniform federal fiduciary duty on brokers and advisers, while the Senate bill directed the SEC to conduct a study on the matter. The House-Senate conference committee struck a compromise, vetted by Senator Tim Johnson, a senior member of the Banking Committee, under which the SEC will conduct a study under what Senator Johnson called strict parameters and the SEC is also authorized to impose a uniform federal fiduciary standard on brokers and investment advisers.

On the day the Senate passed Dodd-Frank, Senator Johnson said that Section 913 reflects a compromise between the House and Senate provisions on the standard of care for brokers, dealers, and investment advisers. It includes the original study provisions passed by the Senate, together with additional areas of study requested by the House--a total of 13 separate considerations and a number of subparts, where we expect the SEC to thoroughly, objectively and without bias evaluate legal and regulatory standards, gaps, shortcomings and overlaps. We expect the SEC to conduct the study without prejudging its findings, conclusions, and recommendations and to solicit and consider public comment, as the statute requires. As Chairman Frank described the compromise when he presented it to the committee, section 913 does not immediately impose any new duties on brokers, dealers and investment advisers nor does it mandate any particular duty or outcome, but it gives the SEC, subsequent to the conclusion of the study, the authority to conduct a rulemaking on the standard of care, including the authority to impose a fiduciary duty. I think this is a strong compromise between the House and Senate positions. (Cong. Record, July 15, 2010, p. S5889).

Investor Protection Act (House)

  • Protecting Investors and Righting Wrongs. The financial crisis exposed the perils of deregulation. The Investor Protection Act will right these wrongs by reforming the Securities and Exchange Commission (SEC) to strengthen its powers, better protect investors, and efficiently and effectively regulate our securities markets.
  • Comprehensive Securities Review and Reorganization. The failures to detect the Madoff and Stanford Financial frauds demonstrate deep deficiencies in our existing securities regulatory structure. An expeditious, independent, comprehensive study of the entire securities industry by a high caliber body will identify reforms and force the SEC and other entities to put in place further improvements designed to ensure superior investor protection.
  • Enhanced SEC Enforcement Powers and Funding. By doubling the authorized funding for the SEC over 5 years and providing dozens of new enforcement powers and regulatory authorities, the SEC will be able to enhance its enforcement programs and gain the tools needed to better protect investors and police today’s markets.
  • Fiduciary Duty. Every financial intermediary who provides advice will have a fiduciary duty toward their customers. Through a harmonized standard, broker-dealers and investment advisers will have to put customers’ interests first.
  • Whistleblower Bounties. A whistleblower bounty program will create incentives to identify wrongdoing in our securities markets and reward individuals whose tips lead to successful enforcement actions. With a bounty program, we will effectively have more cops on the beat in our securities markets.
  • Ending Mandatory Arbitration. Because mandatory arbitration has limited the ability of defrauded investors to seek redress, the SEC will gain the power to bar these clauses in customer contracts.
  • Closing Loopholes and Fixing Faulty Laws. The Madoff fraud revealed that the Public Company Accounting Oversight Board lacked the powers it needed to examine the auditors of broker-dealers. The $65 billion Ponzi scheme also exposed faults in the Securities Investor Protection Act, the law that returns money to the customers of insolvent fraudulent broker-dealers. The Investor Protection Act closes these loopholes and fixes these shortcomings.


On July 15, 2009, the U.S. Department of the Treasury ("Treasury") delivered to the U.S. Congress the Private Fund Investment Advisers Registration Act of 2009 ("Proposed Legislation"), which would, among other things, require certain advisers to private investment funds to register as "investment advisers" with the U.S. Securities and Exchange Commission ("SEC") under the U.S. Investment Advisers Act of 1940 as amended ("Advisers Act").1 The Proposed Legislation would substantially enact the investment adviser reforms recommended by the Obama Administration's U.S. financial services regulatory reform plan, released on June 17, 2009 ("Plan").2

Highlights of the Proposed Legislation include:

  • Eliminating the current private adviser exemption to SEC investment adviser registration;
  • Eliminating the current investment adviser registration exemption for certain commodity trading advisors ("CTAs") registered with the U.S. Commodity Futures Trading Commission ("CFTC");
  • Granting the SEC authority to require registered investment advisers to maintain and submit to the SEC records and reports in respect of the private investment funds advised by them; and
  • Permitting the SEC to define the term "client" and other terms in the Advisers Act differently for different sections of the Advisers Act.
  • Elimination of Private Adviser and Other Registration Exemptions

In keeping with the Obama Administration's Plan, the Proposed Legislation does not require private investment funds themselves to be subject to registration or regulation under the U.S. Investment Company Act of 1940 as amended ("Investment Company Act").3 Instead, the Proposed Legislation requires SEC registration for investment advisers to "private funds"4, as it would amend the Advisers Act and regulations thereunder to eliminate or substantially limit several registration exemptions commonly relied upon by investment advisers to private investment funds.5

The Proposed Legislation would:

  • Eliminate the current "intrastate adviser" registration exemption for any investment adviser to a private fund, amending Advisers Act Section 203(b)(1)6;
  • Eliminate the current "private adviser" (or "counting clients") registration exemption amending Advisers Act Section 203(b)(3)7, thereby requiring investment advisers to private funds with at least $30 million in assets under management to register with the SEC; and
  • Eliminate the current investment adviser registration exemption for certain registered CTAs who act as an investment adviser to a private fund, amending Advisers Act Section 203(b)(6).8

Notwithstanding the spin given to the Proposed Legislation in the media, the effect of the changes would not be limited to advisers to hedge funds. Instead, it would require SEC investment adviser registration for every investment adviser currently relying on the private adviser registration exemption, regardless of whether the adviser manages private investment funds. For example, investment advisers to family offices would be subject to the Proposed Legislation's registration requirements. As noted in the Treasury's press release, the Proposed Legislation is intended to make the registration requirements apply to investment advisers to venture capital funds and private equity funds (among others). Some commentators have argued that these vehicles pose less systemic risk than hedge funds and therefore their managers should be exempt from the SEC investment adviser registration requirements.9

Registration under the Advisers Act would subject presently unregistered investment advisers to the full panoply of the requirements of the Advisers Act and regulations thereunder, including in regard to: advisory contracts; advisory fees; fiduciary duties and standards of care to clients; disclosure to clients and regulators; custody and possession of client assets; recordkeeping; advertising; trading and investment practices; supervision, compliance, and code of ethics practices, policies, and procedures; use of solicitors and placement agents; and SEC inspections, discipline, and disqualification.

Levin may propose banning underwriter shorting

Lawmakers are considering legislation that would ban investment banks from betting against their customers in many circumstances, in a further ripple effect for Wall Street from Goldman Sachs's troubles.

In a statement to The Wall Street Journal, Sen. Carl Levin (D., Mich.) said he is drafting legislation to prevent conflicts of interest by "prohibiting companies from taking the opposite side of the deal for their own account," at least when they are marketing investments they have created themselves.

Mr. Levin and his co-sponsor, Sen. Jeff Merkley (D., Ore.), are aiming to propose an amendment as soon as Monday to the financial-overhaul bill being debated in the Senate.

At a Senate hearing last month in which senators grilled Goldman executives, Mr. Levin focused much of his scrutiny on a handful of deals where he said that Goldman was both constructing subprime-mortgage securities and effectively betting they would fall in value.

Those deals, which carried names like Timberwolf and Hudson, are somewhat different from a 2007 transaction called Abacus that is the subject of civil-fraud allegations by the Securities and Exchange Commission. In Abacus, a hedge fund, rather than Goldman itself, took the "short" side of the transaction, betting the mortgages would decline.

In all of the transactions, a fundamental issue is how much obligation Goldman had—or should have had—to protect its customers' interests. At the Senate hearing, Goldman witnesses frequently spoke in general terms of the firm's role as a "market maker," someone who matches buyers and sellers and can take positions on his own. A market maker's duty to customers is limited.

Mr. Levin says that despite the firm's rhetoric, Goldman's role in the deals under scrutiny was as a securities underwriter or "placement agent," which carries a broader obligation to disclose details about the product. Goldman Sachs doesn't disagree that it was a placement agent in those transactions.

In Timberwolf and similar deals. Mr. Levin says Goldman failed to provide a "full, fair and honest" accounting of its interests. "We believe we acted appropriately in these transactions," said Goldman Sachs spokesman Samuel Robinson.

In the Abacus deal, the SEC suit says Goldman should have told clients that the hedge fund had a significant hand in designing the security it was betting against. Goldman denies wrongdoing, saying that information wasn't material to investors and it had an obligation not to reveal the hedge fund's positions to outside parties.

The proposal by Sens. Levin and Merkley reflects some frustration in Congress over the value of additional disclosure. Rather than put even more legal language in offering documents, the senators are proposing to bar outright a type of transaction that they feel is inherently abusive.

However, J.W. Verret, a George Mason University law professor who testified before a Senate subcommittee last week on bankers' duties to clients, said the proposal would hinder banks from hedging their risks. "This bill really hamstrings investment banks," he said in an interview. "It's putting them between a rock and a hard place."

The Securities Industry and Financial Markets Association declined to comment on Mr. Levin's proposal.

Thomas Hazen, a University of North Carolina law professor who has written a treatise on securities law, predicted there would be opposition from investment bankers to such a far-reaching change.

In addition, he said the Levin-Merkley approach could have shortcomings.

"This seems to be a reasonable way to get at the most problematic aspects of the conflict situation, but it depends on how they define being on the other side," Mr. Hazen said. If the provision isn't carefully drafted it could be possible for bankers to sidestep the prohibition by using multiple transactions, he said.] Wall Street Journal, May 9, 2010

Lawmakers are considering legislation that would ban investment banks from betting against their customers in many circumstances, in a further ripple effect for Wall Street from Goldman Sachs's troubles.

In a statement to The Wall Street Journal, Sen. Carl Levin (D., Mich.) said he is drafting legislation to prevent conflicts of interest by "prohibiting companies from taking the opposite side of the deal for their own account," at least when they are marketing investments they have created themselves.

Mr. Levin and his co-sponsor, Sen. Jeff Merkley (D., Ore.), are aiming to propose an amendment as soon as Monday to the financial-overhaul bill being debated in the Senate.

At a Senate hearing last month in which senators grilled Goldman executives, Mr. Levin focused much of his scrutiny on a handful of deals where he said that Goldman was both constructing subprime-mortgage securities and effectively betting they would fall in value.

Those deals, which carried names like Timberwolf and Hudson, are somewhat different from a 2007 transaction called Abacus that is the subject of civil-fraud allegations by the Securities and Exchange Commission. In Abacus, a hedge fund, rather than Goldman itself, took the "short" side of the transaction, betting the mortgages would decline.

In all of the transactions, a fundamental issue is how much obligation Goldman had—or should have had—to protect its customers' interests. At the Senate hearing, Goldman witnesses frequently spoke in general terms of the firm's role as a "market maker," someone who matches buyers and sellers and can take positions on his own. A market maker's duty to customers is limited.

Mr. Levin says that despite the firm's rhetoric, Goldman's role in the deals under scrutiny was as a securities underwriter or "placement agent," which carries a broader obligation to disclose details about the product. Goldman Sachs doesn't disagree that it was a placement agent in those transactions.

In Timberwolf and similar deals. Mr. Levin says Goldman failed to provide a "full, fair and honest" accounting of its interests. "We believe we acted appropriately in these transactions," said Goldman Sachs spokesman Samuel Robinson.

In the Abacus deal, the SEC suit says Goldman should have told clients that the hedge fund had a significant hand in designing the security it was betting against. Goldman denies wrongdoing, saying that information wasn't material to investors and it had an obligation not to reveal the hedge fund's positions to outside parties.

The proposal by Sens. Levin and Merkley reflects some frustration in Congress over the value of additional disclosure. Rather than put even more legal language in offering documents, the senators are proposing to bar outright a type of transaction that they feel is inherently abusive.

However, J.W. Verret, a George Mason University law professor who testified before a Senate subcommittee last week on bankers' duties to clients, said the proposal would hinder banks from hedging their risks. "This bill really hamstrings investment banks," he said in an interview. "It's putting them between a rock and a hard place."

The Securities Industry and Financial Markets Association declined to comment on Mr. Levin's proposal.

Thomas Hazen, a University of North Carolina law professor who has written a treatise on securities law, predicted there would be opposition from investment bankers to such a far-reaching change.

In addition, he said the Levin-Merkley approach could have shortcomings.

"This seems to be a reasonable way to get at the most problematic aspects of the conflict situation, but it depends on how they define being on the other side," Mr. Hazen said. If the provision isn't carefully drafted it could be possible for bankers to sidestep the prohibition by using multiple transactions, he said.


Sens. Specter and Kaufman seek to attach broker-dealer measure to bank bill

A measure that would ensure broker-dealers are held to a fiduciary standard should be included in sweeping bank reform legislation under consideration on Capitol Hill, Securities and Exchange Commission Chairwoman Mary Schapiro said Thursday.

"I believe that broker-dealers and investment advisers providing the same services, especially to retail investors, should meet that same high fiduciary standard," Schapiro told participants at a Securities Industry and Financial Markets Association conference.

"This is an issue that I hope will be addressed in regulatory reform legislation and one that is fully consonant with the principle of fairness that helped guide the development of the securities laws," said Schapiro.

A new heightened fiduciary standard would raise compliance costs and hike the specter of litigation against broker-dealers. It could also require both originators seeking to sell loans and investors looking to make purchases to each have their own broker-dealer.

Sweeping bank reform legislation under consideration in the Senate so far only requires a report on fiduciary standards, however, at least two lawmakers are seeking to amend the bill to create a fiduciary standard for broker-dealers. Schapiro said she hoped legislators would harmonize regulations for broker-dealers and investment advisers.

Shaprio is also seeking to have the SEC expand its requirement for broker-dealer disclosure to customers.

"We are looking to move past the 1960s check-the-box, paper-based approach by requiring a plain English narrative discussion of an adviser's conflicts, compensation, business activities and disciplinary history," Schapiro said.

Sens. Arlen Specter, D-Penn., and Ted Kaufman, D-Del., have introduced an amendment to the bank reform bill that would require the SEC write rules creating a fiduciary standard for broker-dealers. It's unclear whether the measure would be approved.

The measure is opposed by most Republican lawmakers. However, in questions to Goldman Sachs & Co. at a hearing earlier in April, Sen. Susan Collins, R-Maine, suggested she is considering whether the SEC should require broker-dealers to be subject to fiduciary duties.

Schapiro said last year she supported a fiduciary standard of care for all professionals including broker-dealers.

Sen. Menendez is considering offering an amendment on BD providing investment advice

As the debate over financial regulatory reform heats up in the Senate, the fiduciary-standard issue simmers on a back burner, though its backers haven't abandoned hope of seeing its inclusion in a final bill.

“It is the single most important measure in terms of affecting Main Street investors,” said Texas Securities Commissioner Denise Voigt Crawford, addressing the annual public policy conference of the North American Securities Administrators Association in Washington last week. She also serves as NASAA's president.

Efforts by NASAA and other groups to salvage the fiduciary standard in the legislation may get help from Sen. Robert Menendez, D.-N.J. An aide said that the senator is considering offering an amendment on the Senate floor that would apply the fiduciary standard to broker-dealers providing investment advice.

A provision to apply a fiduciary standard universally to brokers and investment advisers was dropped from the original draft offered by Sen. Christopher Dodd, D-Conn., because of opposition from the insurance and brokerage industries, which contend that such a standard would crimp the ability of brokers to serve clients.

Particularly, there was push-back from brokers' groups who argued that a fiduciary standard that required anyone providing investment advice to act in the clients' best interests would preclude them from conducting customary business, including selling propriety products.

“Carried to its extreme, the very charging of a commission for a transaction may be seen as a conflict,” according to a document circulating on Capitol Hill that was submitted by brokerage firm Edward Jones.

NASAA maintains that the fiduciary standard being considered would still allow brokers to offer non-advice services and charge commissions without running afoul of regulation.

Ms. Crawford and her allies prefer the fiduciary-standard provision contained in the House financial services reform bill, which was approved in December on a mostly party line vote, 223-202.

The Senate Banking Committee, of which Mr. Dodd is chairman, approved the bill March 23 — without Republican support — and the full chamber is expected to begin debate on it this month or early next month.

But when the bill reaches the Senate floor, he won't be able to dismiss Republicans entirely. The Senate Democratic caucus totals 59, one short of the number required to overcome a filibuster.

Some Republicans, however, may support financial reform to avoid the wrath of voters who are angry at Wall Street. In addition, Mr. Dodd and Sen. Richard Shelby, R.-Ala., the ranking Republican on the banking committee, could still reach an agreement on a modified bill.

“That would give a leg up to the Senate,” said David Tittsworth, executive director of the Investment Adviser Association.

At an April 13 press conference, Mr. Shelby stood with Senate Republican leader Mitch McConnell, R.-Ky., as Mr. McConnell denounced the Dodd bill. Later, though, Mr. Shelby left the door open to negotiation.

“We will meet [Democrats] halfway and a get a good bill, if they want a good bill,” he told reporters.

With the Senate back from its spring recess, Mr. McConnell is trying to coalesce the 41 Senate Republicans into monolithic opposition. Democratic leaders maintain that they have patiently worked with Republicans for months and now intend to move forward with a measure that they said will prevent future financial market collapses.

“The big question is whether Sen. Dodd can find one or two Republicans to support his bill,” Mr. Tittsworth said.

Most of the political tension centers on overarching themes such as mitigating systemic risk in the financial system, addressing the too-big-to-fail problem, establishing a consumer financial protection agency and regulating derivatives.

Despite the importance of the issue to the advisory and brokerage businesses, extending the fiduciary standard isn't likely to be decisive in the quest for 60 Senate votes. “These are not the issues that are going to make or break financial services reform legislation,” Mr. Tittsworth said.

Fiduciary standard for institutional clients of BDs considered

As Senate floor debate on financial-regulatory-reform legislation begins, a key Republican senator plans to offer an amendment on fiduciary standards that could be broader than language contained in a bill that the House passed late last year.

At two hearings last week, Sen. Susan Collins, R-Maine, indicated that she may favor imposing fiduciary requirements on broker-dealers for both retail and institutional investors. An aide to Ms. Collins said that specific language for a specific amendment hasn't yet been drafted.

But during a contentious April 27 hearing, Ms. Collins grilled current and former officials of The Goldman Sachs Group Inc. on whether they put company profits above the welfare of their clients.

“I raised what I think is an essential issue, and that is whether Goldman Sachs is acting in the best interests of their clients and whether there should be a fiduciary obligation imposed on broker-dealers, imposed on the large investment companies,” she told reporters as she left the hearing.

The topic has gained momentum just as the full Senate began consideration of the financial-reform bill last Thursday. The process is expected to last a couple of weeks and involve scores of amendments.

The bill that emerged from the Senate Banking Committee in March does not contain language imposing a fiduciary standard on broker-dealers. Instead, it calls for a Securities and Exchange Commission study on whether broker-dealers who provide investment advice should meet the same fiduciary obligation as investment advisers. An amendment written by Sens. Robert Menendez, D-N.J., and Daniel Akaka, D-Hawaii, would add to the Senate bill the provision contained in the House financial-reform bill, which instructs the SEC to move ahead with writing a fiduciary standard regulation for broker dealers.

The House language would apply only to retail investors. In her questioning of Goldman Sachs executives, Ms. Collins indicated that she favors broader fiduciary coverage.

The March Senate draft requests additional study of "fiduciary duty"

An industry group that has been pushing for a uniform fiduciary duty for advisers isn't giving up hope.

As expected, the idea of imposing such a duty on all financial advisers has been pretty much dropped from the financial-reform bill unveiled today by Senate Banking Committee Chairman Christopher Dodd (D-Conn.). He wants regulators to study some more on the issue.

Nevertheless, The Committee for the Fiduciary Standard called on executives of major securities firms and banks to sign off on a pledge to follow the fiduciary standards established under the Investment Advisers Act of 1940.

The committee sent a letter today to Brian Moynihan, chief executive of Bank of America Corp., and Sallie Krawcheck, president of the bank's global wealth and investment management unit. He sent similar letters to Jamie Dimon, chief executive of JPMorgan Chase & Co., John Mack, chief executive of Morgan Stanley, and Lloyd Blankfein, chief executive at The Goldman Sachs Group Inc.

"We'll have to see" if any of the executives sign off, said Knut Rostad, chairman of the fiduciary-standard committee, and the regulatory and compliance officer at Rembert Pendleton Jackson, and advisory firm with about $600 million under management.

In an interview with InvestmentNews, Mr. Rostad said two of the firms have asked for follow-up information, but he declined to identify the firms.

"Morgan Stanley is aligned with the industry position outlined by [the Securities Industry and Financial Markets Association]," Morgan Stanley spokesman Jim Wiggins said in a statement.

SIFMA supports a "new federal securities standard of fiduciary care that would apply uniformly to broker-dealers and investment advisors who provide personalized investment advice," Mr. Wiggins said.

He added that most Morgan Stanley Smith Barney LLC brokers are dually registered and subject to a fiduciary standard with their clients' advisory accounts.

Mr. Dodd's bill calls for the Securities and Exchange Commission to study the issue of imposing a "uniform fiduciary duty on financial intermediaries who provide similar investment advisory services," according to the bill.

In an e-mail, Melissa Daly, a Goldman Sachs spokeswoman, referred InvestmentNews to a January statement by Mr. Blankfein to the Financial Crisis Inquiry Commission.

"We do support the extension of a fiduciary standard to broker-dealer registered representatives who provide advice to retail investors," Mr. Blankfein told the committee. "The advice-giving functions of brokers who work with investors have become similar to that of investment advisers."

Ms. Daly was not immediately available for further comment. Spokespersons for BofA and JPMorgan were not immediately available.

Mr. Rostad called the Dodd bill a "bump in road" toward achieving widespread fiduciary duty.

"When you have the chairman of the SEC, the chief executive of the Financial Industry Regulatory Authority Inc., the CEO of Goldman Sachs and [the head of] SIFMA calling for some variation of a fiduciary standard, it suggests there's movement … that's not going to stop," he said.

On a call with reporters today, Mr. Rostad said a fiduciary requirement could still be added as financial reform moves through Congress.

March Senate draft shifts oversight of 4,200 firm to state regulators

"An additional 4,200 investment advisory firms regulated by the Securities and Exchange Commission will fall under the purview of state regulators if the Senate passes the financial-reform bill.

The bill — passed by the House in December — would move the threshold for firms regulated by states from $25 million in assets or less to $100 million or less. The same provision is in the bill that the Senate is expected to take up when it reconvenes next week.

“Assuming the Senate enacts a bill, [the new asset threshold] is highly likely,” said Neil Simon, vice president of government relations at the Investment Adviser Association.

“If there's any [financial-reform] legislation at all, [the new threshold] will be in it,” said Denise Voigt Crawford, Texas' securities commissioner and president of the North American Securities Administrators Association Inc.

The House legislation and the Senate bill have basically the same provisions for a higher threshold, Mr. Simon said; therefore, the proposals will not be altered during House-Senate negotiations to finalize legislation..."

Senator Kohl's "Financial Planners Act of 2010"

"The Financial Planning Coalition has found a last-minute angel in Sen. Herbert Kohl, who is proposing language in the Senate's financial-reform bill that would require anyone professing to be a planner to have to register with an SEC-approved oversight board.

Advocates are skeptical, however, that the Wisconsin Democrat's Financial Planners Act of 2010 will see the light of day.

“The Kohl proposal is not going anywhere,” said Mercer Bullard, president and founder of Fund Democracy Inc., a consumer group that has been battling to no avail to make a fiduciary standard of care mandatory for anyone who offers financial advice. Insurance agents in particular, he said, carry great weight in every congressional district and are lobbying against the proposal that Mr. Kohl is trying to get inserted into the Senate Banking Committee's draft of financial-reform legislation.

Under the proposal, anyone affiliated with an investment adviser who advertised himself or herself as a financial planner and offered at least two planning services would have to become a registered financial planner. Those not designating themselves as planners wouldn't be in the clear, because the draft also says that registration would be required for planners who claimed exclusions because they advertised professional or educational attainments, an allusion widely believed to apply to insurance agents who identify themselves as chartered life underwriters and list other credentials after their names.

Finally, the proposal would give the Securities and Exchange Commission carte blanche to apply the registration requirement to anyone for whom “such an identification is necessary and appropriate in the public interest and for the protection of investors or other consumers of financial planning services.”

The oversight board, whose members couldn't be financial planners or be affiliated with investment advisers, broker-dealers, banks, insurers or futures commission merchants, would establish ethical standards that would “require each registered financial planner to adhere to a fiduciary standard” as interpreted through the Investment Advisers Act of 1940, according to an executive summary of Mr. Kohl's proposal.

Senator Johnson trying to eliminate broker "fiduciary standard"

Lobbying by insurers and banks including Morgan Stanley may eliminate a proposed new standard that would make retail brokers more accountable to their clients.

Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel’s reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there’s need for a new broker standard.

Consumer advocates have pushed for the fiduciary standard, arguing that investors are misled by the adviser title used by thousands of brokers. Investors have difficulty distinguishing between investment advisers and brokers, and most see their brokers as advisers, according to a 2008 Rand Corp. study commissioned by the SEC. Without the fiduciary requirement, brokers don’t have the same accountability for their advice as investment advisers and have more leeway to sell financial products created by their own firms instead of seeking the best investment for the customer.

“Retail investors have suffered incredible losses in the recent crisis,” said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America. “This provision would at least help protect investors against some of the toxic investments they were peddled by their financial advisers.”

Dodd Proposal

The regulatory overhaul approved by the House of Representatives in December included a section that would require a new fiduciary standard for brokers, one that would be defined by the SEC. Consumer advocates say that would likely end up being less onerous than what investment advisers now face.

The original Senate proposal put forward by Connecticut Democrat Christopher Dodd, who heads the banking committee, went further and eliminated the distinction between investment advisers and brokers, bringing them under the same standard.

Dodd withdrew his bill after Republicans opposed it and has been negotiating with them to come up with a bipartisan bill.

Life insurance companies, which employ thousands of financial advisers, have led the fight against extending the fiduciary standard to brokers, according to lobbyists involved in the discussions on Capitol Hill. In a Nov. 20 letter to Dodd and Richard Shelby, the ranking Republican on his committee, three trade associations representing such companies urged the senators to drop the section on fiduciary standards.

Morgan Stanley Lobbying

The National Association of Insurance and Financial Advisors, the National Association of Independent Life Brokerage Agencies and the Association for Advanced Life Underwriting said they represent about 500,000 life insurance agents who would be treated as investment advisers under the proposal originally put forward by Dodd.

Spokesmen for the three groups didn’t respond to e-mails and phone calls requesting comment.

Morgan Stanley, the largest retail brokerage in the U.S. after buying majority control last year of Citigroup Inc.’s Smith Barney unit, has argued that brokers provide different services than investment advisers, according to documents presented by the New York-based firm’s lobbyists to senators and obtained by Bloomberg.

Talking Points

The bank says in 13 pages of talking points and proposed legislative language that “the SEC should be given the responsibility to thoughtfully review brokerage services and regulations, and promulgate new, specifically tailored rules for the brokerage business.”

James Wiggins, a spokesman for Morgan Stanley, wouldn’t confirm that such a document was used in congressional meetings. He said the positions are representative of Morgan Stanley’s stance on the subject.

That’s the position adopted by the House and advocated by the Securities Industry and Financial Markets Association since last July. Morgan Stanley is a member of SIFMA, Wall Street’s largest lobbying group.

“We generally support the House version,” said Kevin Carroll, SIFMA’s associate general counsel. “We’d prefer the Senate version look more like the House’s, but if that can’t happen, then the SEC study proposal would be a reasonable way to move forward.”

Julianne Fisher, a spokeswoman for Senator Johnson, who is pushing the SEC study, didn’t return phone calls seeking comment.

LPL Financial

Another SIFMA member, Boston-based LPL Financial, has also lobbied Dodd and other committee members to accept the House version. Most of LPL’s 11,150 financial advisers are registered both as brokers and as investment advisers, according to the firm’s general counsel, Stephanie Brown. She said her company is opposed to another study.

“These lengthy studies are never productive, and the time for change is now, when the momentum is here,” Brown said. “The Rand study has already looked at these issues and should provide the guidance for the reforms needed.”

Letting the SEC come up with a new fiduciary standard for brokers will likely mean a lighter standard that won’t match the accountability of the investment advisers, according to the North American Securities Administrators Association, which represents state regulators of brokerages.

“Everybody keeps saying they’re in favor of a fiduciary standard, but then they keep qualifying what they mean by it,” said NASAA President Denny Crawford. “That is very disingenuous. The existing fiduciary standard is strong enough and shouldn’t be diluted.”

AARP, NASAA and CFA in support of Senate bill

A coalition including AARP, NASAA and Consumer Federation of America has written a joint letter to Senators Dodd and Shelby (Chair and Ranking Member, respectively, of the Senate Banking Committee) urging their support for the elimination of the broker-dealer exclusion in the definition of investment adviser in the Investment Advisers Act. If adopted, broker dealers offering investment advice would be subject to the fiduciary duties applicable to other investment advisers. They charge that the proposed legislation has been the subject of intense lobbying efforts by the broker-dealer and insurance industries and single out the latter's attacks as "particularly virulent." They note that regulators have identified unsuitable sales of expensive variable annuities by insurance salesmen as a longstanding and serious problem.

Frank says no to expanded FINRA

Investment advisory groups, state regulators and consumer advocates last week cheered a pledge by the House Financial Services Committee's chairman to defeat a measure that could expand Finra's reach over advisers.

“We could not be happier,” Texas Securities Commissioner Denise Voigt Crawford said of Rep. Barney Frank's plans to oppose an amendment to the proposed Investor Protection Act that would give the SEC the authority to put Finra in charge of a quarter of all federally registered investment advisory firms.

Ms. Voigt is president of the North American Securities Administrators Association Inc.

The amendment, which was sponsored by the ranking Republican member of the committee, Rep. Spencer Bachus, R-Ala., was contained in the bill approved last Wednesday by 41-28 vote of the committee.

It was included over the objections of Mr. Frank, who declared he would fight to remove the amendment from the bill when it goes to the full House next month as part of a broader package of proposed legislation aimed at bringing about financial reform. Mr. Frank, a Massachusetts Democrat, is chairman of the committee.

"VERY PLEASED'

“We're very pleased with Chairman Frank's decision to basically reverse that amendment,” Financial Planning Association chief executive Marvin Tuttle said. “That will mean that we still have the opportunity to see financial advisers properly regulated under an appropriate regulatory scheme.”

The FPA, and other adviser groups, strongly oppose the Bachus amendment on the grounds that the Financial Industry Regulatory Authority Inc's expertise is with brokers, not investment advisers. They fear Finra would weaken existing fiduciary standards governing financial professionals who provide personal advice to clients.

Barbara Roper, director of investor protection for the Consumer Federation of America, also came out in favor of Mr. Frank's decision to try to strip the Bachus amendment from the legislation.

“The Bachus amendment is a radical change in regulatory approach that we oppose,” she said.

Finra declined to comment on the results of the vote. Beforehand, however, the self-regulatory organization expressed its support for the Bachus amendment.

The amendment would allow Finra “to put more boots on the ground,” Finra spokeswoman Nancy Condon wrote in an e-mail earlier in the week.

“It is disappointing, but not surprising, that industry groups oppose more-frequent examination of their firms,” she wrote. “It is obvious that these industry groups would like to keep it that way.”

The Securities and Exchange Commission this year expects to examine only 9% of the investment advisory firms it regulates, Ms. Condon noted, while Finra inspects 55% of the brokerage firms it regulates.

Although opponents of the amendment were pleased by Mr. Frank's decision to oppose it, obstacles still remain, said David Tittsworth, executive director of the Investment Adviser Association.

For starters, the full House will be dealing with many high-profile rule proposals in the legislation package, including the formation of a Consumer Financial Protection Agency, systemic-risk regulations and restrictions related to executive compensation.

The Bachus amendment, said Mr. Titts-worth, could easily get lost in the crowd.

Second, it remains to be seen whether other legislators are in favor of removing the amendment, he added.

“The investment adviser community needs to get politically active and let their members of Congress know where they stand on this issue,” said Mr. Tittsworth.

If passed, the Bachus amendment could give Finra the authority to regulate the investment advisory businesses of dually registered firms, as well as investment advisory firms and representatives that are associated with brokerage firms.

In total, that could cover about 25% of all federally registered advisory firms — a group that in aggregate manages nearly 80% of investment advisory assets — as well as 88% of all investment adviser representatives who are dually registered as representatives of broker-dealer firms, according to an analysis done by the amendment's opponents.

Giving Finra authority over advisers would weaken fiduciary standards that advisers are required to abide by, according to critics.

“For years, Finra and its predecessor organization, NASD Regulation, have sided with brokers in opposing efforts to hold brokers to a fiduciary standard when they provide investment advice,” according to a letter sent last week to leaders of the Financial Services Committee by the FPA, CFA Institute, the IAA, the National Association of Personal Financial Advisors, the Certified Financial Planner Board of Standards Inc. and Shareowners.org, which is a group of long-term investors that includes unions and shareholder activists.

Under the amendment, “Finra could become the main arbiter of how the fiduciary duty is applied to conduct by brokers, SEC-registered advisers with broker-dealer affiliates, and most financial planners,” the letter said.

“We have significant concerns with this proposal,” said David Bellaire, the FSI's general counsel and director of government affairs. “They have increased the regulatory burden on [dually registered] firms, where the supervision was already quite substantial, and they've done nothing to address the real regulatory gap that exists over investment advisory firms.”

The FSI supports having an SRO for investment advisory firms, but it has not come out in favor of having Finra in that role.

SINGLE AUDITOR PREFERRED

Even as advisory groups push to prevent Finra from regulating their industry, some brokers say Finra regulation makes sense for firms that are either dually registered or associated with brokerage firms. “Finra already audits my broker-dealer,” said Paul Mendelsohn, president of Windham Financial Services Inc., a dually registered firm that manages about $28.7 million “I would just as soon have one regulator to deal with, as opposed to having Finra audit my broker-dealer and the SEC audit my registered investment advisory side.”

Finra should be able to regulate individuals associated with brokerage firms “to the full extent of Finra regulations,” said Jim Dowd, president of fee-only advisory firm North Capital Inc., which manages about $10 million.

If Finra had control over all financial professionals at broker-dealers and associated firms, the SRO would have been better able to ensure that representatives followed appropriate regulations, he said. “It clarifies the regulatory lines.”


"My recent Forbes column, Regulating Wall Street by J. Wellington Wimpy, warned the public about the games being played by the House Committee on Financial Services as it began consideration on Oct. 1, 2009, of the Discussion Draft of the Investor Protection Act of 2009. By now, we are all used to some of the backdoor deals and unprincipled compromises that too often masquerade as politics—so, to that extent, we have become a bit numb to the nonsense. However, I think that Capitol Hill took its legislative legerdemain to new depths, when Representative Spence Bachus (R. Ala) inserted an amendment to the draft Act that gave the Financial Industry Regulatory Authority (FINRA) the power to oversee any adviser associated with a registered broker-dealer, including about 500 dually registered FINRA members.

I know—giving some self-regulatory organization (SRO) such as FINRA a measly 500 new members to regulate doesn't seem like anything to get into a lather over. However, when is enough enough already? We're talking about combating Wall Street fraud, protecting investors, reforming failed regulators and that seems like an opportunity for some politicians to dole out favors or paternalistically pat us all on the head and send us out for milk and cookies while the big boys take care of business?

Bachus' action is troubling on a number of levels—as is the ratification of his amendment by the Committee.

First, the investing public is essentially sandbagged when legislators drop explosive amendments onto any proposed act with little notice or warning—and to do so when drafting the Investor Protection Act seems even more unseemly. Were the representatives even able to read the draft amendment in that smoke-filled back room?

Second, the proposed allocation of expanded regulatory power over registered investment advisors (RIAs) to FINRA comes at the same time that the Committee passed an amendment from Representative Carolyn McCarthy (D.NY) deferring the implementation of a self-regulatory option for RIAs and instructing the Securities and Exchange Commission (SEC) to embark upon a six-month investigation of the issue. Anyone ever hear about the danger of mixing matter and anti-matter?

Third, Bachus's Capitol Hill coup rewards what many view as a failed regulator (FINRA) and a failed system of regulation (self-regulation) with the plum of more revenue in the form of expanded jurisdiction. Nothing compelled this hasty arrogation to FINRA. After all, this same House Committee had recently revised the threshold by which RIAs were delegated between the states and the SEC, and the states welcomed the increased oversight. I am not aware of any credible literature urging that FINRA be immediately handed some 500 dual registrants.

Representative Bachus' amendment and its passage by his colleagues would be baffling if it weren't symptomatic of so much that is wrong with our political system. Has the House Committee been reading a different history of Wall Street's regulatory failures than the rest of us? Was FINRA's regulation of Wall Street so superlative during the Madoff and Stanford years that the SRO is deserving of this accolade?

On November 2, 2009, the North American Securities Administrators Association (NASAA) sent a Letter to House Financial Services Committee Leadership Regarding Investor Protection Act Amendments. Consider this powerful attack by NASAA:

We are very concerned with the far-reaching implications of an amendment offered by Ranking Member Spencer Bachus that would permit the SEC to delegate responsibility to the broker-dealer SRO, FINRA, to enforce compliance by its members and associated persons with the provisions of the IPA. In other words, the amendment would provide the SEC with the authority to empower FINRA to enforce the fiduciary duty provisions in the Investment Advisers Act against not only broker-dealer members but also any affiliated investment advisory firm or any associated person. Additionally, the amendment would give FINRA sweeping rule-making authority.

During the discussion of this amendment, Chairman Frank remarked that regulation should be a government function and NASAA wholeheartedly agrees. NASAA is opposed to any effort to expand the jurisdiction and authority of private, membership organizations into an area that is more appropriately the province of government. The regulation of investment advisers is the responsibility of state and federal governments accountable to the investing public. Extending this responsibility to a private, membership organization amounts to an "outsourcing" of a government regulatory obligation.

Recognizing the need for careful analysis of the risks and benefits of delegating additional authority to an SRO, the Committee approved a study proposed by Rep. Carolyn McCarthy to determine whether the very action provided in the amendment was even necessary. The Bachus amendment directly contravenes the spirit and intent of the McCarthy amendment. Until such time as this and other studies called for in the IPA are complete, the Committee should refrain from taking such a dramatic step. The Committee’s desire to improve the regulation and examination of investment advisers is understandable. The SEC’s examination of advisers is woefully inadequate and that is why, as noted above, NASAA supports raising the dividing line for registration of advisers with state securities regulators. The IPA also contains other appropriate provisions designed to address this issue: increased funding for the SEC and providing the SEC with the authority to collect fees from investment advisers covering all costs relating to the agency’s adviser examination activities.

Additionally, on November 2, 2009, the Consumer Federation of American, Investment Adviser Association, Shareowners.org, National Association of Personal Financial Advisors, Certified Financial Planner Board of Standards, Inc., and the Financial Planning Association issued a Joint Letter stating, in part:

Perhaps the most serious threat to the fiduciary duty came on a seemingly unrelated amendment. That amendment by Ranking Member Bachus, which was adopted on a voice vote, would permit the SEC to delegate responsibility to the broker-dealer self-regulatory organization, FINRA, for enforcing compliance with the Investment Advisers Act for its members and persons associated with its members. Based on an analysis of IARD data, the authority to oversee “persons associated with members” could extend FINRA’s jurisdiction to between 25 percent and 30 percent of all federally registered investment advisory firms. In aggregate, these firms manage almost 80 percent of advisory firms’ total assets under management. In addition, according to the North American Securities Administrators Association, roughly 88 percent of all investment adviser representatives are dually registered as representatives of broker-dealer firms. As a result, the amendment would appear to permit the SEC to designate FINRA as the de facto SRO for the majority of investment adviser representatives, including financial planners who combine advice and implementation services. The SEC could delegate this authority to FINRA with no further involvement of Congress and no prior analysis of the risks and benefits of that approach.

Moreover, the amendment gives FINRA not only inspection and enforcement authority, but also rule-making authority under the Investment Advisers Act. Both are problematic.

In the first instance, this amendment appears to reward FINRA for its failures in the Madoff and Stanford cases, and its misleading statements about the causes of those failures, with a broad expansion of authority. While FINRA has brazenly claimed that a gap in its authority prevented it from examining Madoff’s advisory operations, in fact Madoff was solely a broker-dealer during virtually the entire duration of the scheme, and FINRA had full jurisdiction over its conduct. Moreover, although FINRA supporters claim this broadened authority is needed to supplement inadequate SEC oversight, separate provisions of the bill already address that resource problem by reducing the number of advisers that are subject to SEC oversight, by authorizing substantially increased SEC’s funding, and by providing for user fees to support enhancement of the SEC’s inspection program. Despite the SEC’s failings, we believe that this approach is preferable to delegating broad investment adviser oversight responsibility to an organization with a broker-dealer mindset.

Even more disturbing than its expansion of inspection authority is the amendment’s broad grant of rulemaking authority to FINRA. For years, FINRA and its predecessor organization, NASD Regulation, have sided with brokers in opposing efforts to hold brokers to a fiduciary standard when they provide investment advice. With the rulemaking and enforcement authority this amendment would provide, FINRA could become the main arbiter of how the fiduciary duty is applied to conduct by brokers, SEC-registered advisers with broker-dealer affiliates, and most financial planners. All of the concerns outlined above regarding weaknesses in the underlying legislation would be magnified if FINRA were given this rulemaking role and continued to adopt its industry-centric approach to the issue.

November 13, 2009,

US regulatory actions

SEC recommends uniform fiduciary standard

The Securities and Exchange Commission submitted to Congress a staff study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers -- no less stringent than currently applied to investment advisers under the Advisers Act -- when those financial professionals provide personalized investment advice about securities to retail investors.

Additional Materials

The study, provided to Congress last night, which looked into obligations and standards of conduct of financial professionals, was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the study, the staff notes that investment advisers and broker-dealers are regulated extensively under different regulatory regimes. But, many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers. The study finds that "many investors are also confused by the standards of care that apply to investment advisers and broker-dealers" when providing personalized investment advice about securities.

The study further states that "retail investors should not have to parse through legal distinctions to determine" the type of advice they are entitled to receive. "Instead, retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer."

At the same time, the study notes that retail investors should "continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide."

As a result, the study "recommends that the Commission . . . adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers." The standard, according to the study, should be "no less stringent than currently applied to investment advisers under [the] Advisers Act."

The study also "recommends that when broker-dealers and investment advisers are performing the same or substantially similar functions, the Commission should consider whether to harmonize the regulatory protections applicable to such functions. Such harmonization should take into account the best elements of each regime and provide meaningful investor protection."

The study concludes that the "staff's recommendations were guided by an effort to establish a uniform standard that provides for the integrity of personalized investment advice given to retail investors. At the same time, the staff's recommendations are intended to minimize cost and disruption and assure that retail investors continue to have access to various investment products and choice among compensation schemes to pay for advice."

DOL expands definition of fiduciary and investment advice

The U.S. Department of Labor (“DOL”) recently released a proposed regulation that would greatly expand the circumstances in which a person could be considered a “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) when providing non-discretionary investment advice. ERISA provides that a person (either an individual or an entity) that provides investment advice for a fee is a fiduciary. An existing DOL regulation sets out a long-standing and widely accepted method of determining when a person is providing investment advice for purposes of ERISA. The proposed regulation would dramatically change this method and, therefore, is likely to prove very controversial. Public comments on the proposed regulation are due by January 20, 2011.

If the DOL adopts the proposed regulation in its current form, many financial institutions and other service providers, such as appraisers and other valuation firms and broker-dealers that are typically not now fiduciaries under ERISA, are more likely to become fiduciaries and, as such, will be subject to the fiduciary duties, prohibited transaction rules, and potential liability imposed by ERISA. The proposed regulation also would change the definition of “fiduciary” for purposes of the prohibited transaction provisions of section 4975 of the Internal Revenue Code (“Code”), and thereby will affect service providers to individual retirement accounts and other non-ERISA plans. The proposed regulation also would affect service providers to collective investment vehicles whose assets are “plan assets” for purposes of ERISA and the Code. The scope of the proposed regulation is mitigated somewhat by exceptions for certain brokerage services, investment education and valuation services.

Read more here.

SEC approves safeguards for assets controlled by investment advisers

"...The SEC’s custody rule as amended today would promote independent custody and require the use of independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the rules would require the adviser to be subject to a surprise exam and custody controls review that are generally not required under existing rules.

Surprise Exam — The adviser is now required to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. Such a surprise examination would provide another set of eyes on the client’s assets, and provide additional protection against theft or misuse. The accountants would have to contact the SEC if they discovered client assets were missing.

Custody Controls Review — When the adviser or an affiliate serves as custodian of client assets, the adviser is now required to obtain a written report — prepared by an accountant that is registered with and subject to regular inspection by the PCAOB — that, among other things, describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests. These reports are commonly known as SAS-70 reports. Requiring that the accountant be registered with and subject to inspection by the PCAOB provides greater confidence regarding the quality of these reports.

The new rules also will impose an important new control on advisers to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund's financial statements to fund investors. The rule will require that the auditor of such a private fund be registered with and subject to regular inspection by the PCAOB.

The new rules also require that the adviser reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements. It also will enable clients to compare the account statement they receive from their adviser to determine that the account transactions are proper..."

SEC Chair on "Applying the Same Standards"

Treating Securities Professionals' Similarly -- Applying the Same Standards

"...So, imagine an investor walking down Main Street in the town where you grew up. He steps into the office of the local securities professional and is handed a business card.

But he doesn't look to see whether it says broker-dealer or investment adviser. Chances are he doesn't know the difference. Or even care. All he wants is helpful, investor-focused advice, a fair deal and a professional he can trust.

These seem to me to be reasonable expectations. But today that investor — whether he knows it or not — is treated differently depending on what that business card says. If it's a broker-dealer, he's sold a product that is, "suitable" for him. If it's an investment adviser, he gets treated under a higher standard — the fiduciary duty standard — meaning that the investment adviser has to provide advice that puts the investor's interest first.

Investors today should not be treated differently based on what door they walk into — or based on what is written on the business card they are handed.

Instead, I believe that all securities professionals should be subject to the same fiduciary duty — and that all investors receiving advice should rest assured that the advice they get is being given with their interest at heart.

But, to be effective, the fiduciary duty needs to be meaningful and uniform across all securities professionals. It cannot be weakened or diluted just so that it can be applied broadly.

At the same time, we should not assume that the investor is fully protected just because the professional on the other side of the desk is subject to a fiduciary standard.

To fully protect the interests of that investor, we must couple the fiduciary duty with an effective oversight regime. And because that investor doesn't differentiate between broker-dealers and investment advisers, our rules should not either.

Securities professionals, regardless of what their business card says, should be subject to the same standard of conduct, the same licensing and qualification requirements, the same disclosure obligations, the same regulatory and recordkeeping standards and a robust examination and oversight schedule.

This approach may disrupt a number of entrenched interests. But, we are doing no service to retail investors by continuing with a distinctly different regulatory approach for professionals who perform virtually the same or similar services.

I thank Congress and the Administration for their leadership in moving us toward a unified fiduciary standard and a harmonized regulatory regime for broker-dealers and investment advisers...."

SEC Chair warns broker-dealers on compensation incentives

Source: Chairman Schapiro Issues Open Letter to Broker-Dealer CEOs August 31, 2009, SEC

"...Certain forms of potential compensation may carry with them enhanced risks to customers. Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special alTangements that they have been given. Those pressures may in tum create incentives to engage in conduct that may violate obligations to investors. For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to chum customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but i's not in investors' interest.

I therefore encourage broker-dealer firm CEOs and their fellow supervisors to be particularly vigilant in ensuring that sales practices are closely monitored and that investor interests are carefully considered in the sale of any security or other investment product."

State securities regulator questions Schapiro's ‘single standard'

"SEC Chairman Mary Schapiro's comments on Thursday that all financial advisers who provide personalized advice should come under “meaningful” fiduciary standards has drawn heat from a group representing state securities regulators.

Speaking at a press conference in Washington, Denise Voigt Crawford, president of the North American Securities Administrators Association Inc., questioned how stringent such a standard would be.

“Everybody is saying that they believe in one standard, and everybody is saying that they believe that it should be a fiduciary standard,” said Ms. Crawford, whose group advocates putting all brokers and advisers under the traditional standard established by the Investment Advisers Act of 1940.

“If you listen to Mary Schapiro speak, she'll say there needs to be one standard; it needs to be fiduciary. But she never says that it should be the '40 Act standard. That is huge, and it's very worrisome to us — because anything else is whatever people decide it's going to be.”

In an e-mail, Securities and Exchange Commission spokesman John Nester noted that Ms. Schapiro has testified in support an Obama administration proposal containing language calling for broker-dealers and investment advisers to act “solely in the interests of their customers or clients when providing investment advice.”

Draft legislation in the Senate would require brokers to come under the Investment Advisers Act and traditional fiduciary standards. “The Senate approach preserves the … authentic fiduciary standard,” Ms. Crawford said.

Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, noted his group's support for the establishment of a federal fidicuary standard that will improve upon the current patchwork system that governs those who provide personalized investment advice.

SIFMA, which represents the brokerage industry, favors having the Securities and Exchange Commission write new rules that would create a uniform fiduciary standard, but would still allow brokers to conduct business as they have done, including allowing principal trades.

“We may disagree on how to do it, such as simply repealing the broker-dealer exemption from the ‘40 Act, but disagreeing on the way to accomplish the goal does not mean we oppose the goal,” Mr. DeSouza wrote in an e-mail.

Ms. Crawford, who is also Texas securities commissioner, criticized parts of the financial reform package pending in the House, particularly a Republican-sponsored provision that would place many investment advisory firms under the regulation of the Financial Industry Regulatory Authority Inc.

The possibility of Finra oversight of advisory firms “causes us great concern,” Ms. Crawford said. “We do not really want Finra to take on this role,” she said. “Finra is a private organization that is accountable to its own members.”

House Financial Services Committee Chairman Barney Frank, D-Mass., has vowed to fight the Finra oversight provision when the bill is considered by the full House.

NASAA supports proposals pending in both houses of Congress that would move jurisdiction of about 4,000 investment advisory firms from the SEC to the states. To prepare for that responsibility, Ms. Crawford said she signed a rare NASAA “Memorandum of Understanding” Dec. 2 that will allow states to work with each other to regulate the additional advisory firms.

All states are expected to sign onto the MOU if the legislation is enacted. The House and Senate bills would raise the asset threshold to $100 million for advisory firms to be regulated by the SEC. Currently advisory firms with more than $25 million are regulated by the SEC.

The states will be able to inspect advisory firms more frequently than the SEC is currently able to do, Ms. Crawford said. The SEC now only inspects about 9% of the approximately 11,000 advisory firms is has jurisdiction over.

State securities administrators also favor Senate draft legislation requiring the Commission to issue rules banning or restricting mandatory arbitration clauses in broker contracts with customers. A bill in the House only provides an option for the SEC to consider rules to prohibit the clauses. Investors need alternative forums for dispute resolution, including going to small claims court, Ms. Crawford said.

The NASAA head skewered the SEC and Finra for not detecting the massive Ponzi scheme fraud perpetrated by Bernard L. Madoff Investment Securities LLC. She labeled those as “failures on the part of federal regulatory agencies,” including Finra in that characterization.

A special Finra review showed that the authority did not have access to the information the SEC had about the fraud in the Madoff investment adviser, Howard M. Schloss, executive vice president for corporate communications and government relations, wrote in an e-mail.

Finra has taken many steps in the wake of Madoff to improve its fraud detection capabilities, including the creation of the Office of Fraud Detection and Market Intelligence, he added.

Asked whether the SEC has improved its performance over the past year, Ms. Crawford said that, “The jury is still out on whether the culture at the SEC is going to change,” she said.

“The folks that are employed at the commission, most of the time are looking for a job on Wall Street,” Ms. Crawford said. “It makes it very difficult for them to take a hard line against their future employer who's sitting across the table.”

Mr. Nestor disagreed. “The change at the SEC has been dramatic. We have brought on new senior management, seen significant increases in the numbers of investigations and penalties, pursued important investor-focused rulemaking and reformed out internal operations.”

He added: “We are aware of no basis for the comments.”

Kanjorski: SEC should define fiduciary standard

The Securities and Exchange Commission would be expected to define a fiduciary standard that would be applied to brokers and investment advisers, according to draft legislation released this afternoon by House Capital Markets Subcommittee Chairman Paul Kanjorski, (D-Penn.).

The 114-page draft of the “Investor Protection Act” put forward by Mr. Kanjorski would require the SEC to issue rules requiring all financial service professionals who provide advice to act “in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.”

The Securities Industry and Financial Markets Association, which represents Wall Street, supports the idea of having the SEC develop a more precise definition of what it means to be a fiduciary. Indeed, fiduciary standards are currently ill defined, said Kevin Carroll, SIFMA's managing director and associate general counsel.

However, the Investment Adviser Association does not want the SEC to issue new standards.

“We think trying to define fiduciary duty would be a mistake,” IAA executive director David Tittsworth said. “It's no more appropriate to insist on a precise definition of fiduciary duty than it would be to insist on a precise definition of the duty not to commit fraud.”

The bill also would double SEC funding over five years and provide new enforcement powers and regulatory authority, and it would ban the industry practice of requiring mandatory arbitration provisions in investor contracts.

A hearing is scheduled to be held Oct. 6 in the House Financial Services Committee on adviser and other issues.

Mr. Kanjorski also released a draft bill that would require hedge fund and other private fund advisers to register with the SEC, and another draft that would set up a Federal Insurance Office in the Treasury Department to monitor the insurance industry and recommend insurers that should be subject to systemic risk regulation by the Federal Reserve Board. The office would have the authority whether state insurance regulations should be pre-empted by international treaties.

Labor Dept want fiduciaries or computer models for retirement advice

Proposed regulations that would limit the way that financial advisers are compensated for working with retirement plans are forcing broker-dealers to reconsider how their -representatives sell and advise retirement plans.

The proposed regulations, which were issued by the Labor Department last month, would allow broker-dealers to offer advice to plan participants only if their reps acted as fiduciaries or, if acting as a registered rep, they used an impartial computer model to pick investments.

“The regulation is trying to separate advisory from other business and keep revenues in separate buckets,” said John Simmers, director of risk management and product development for the Compliance Department Inc. “[The Labor Department] doesn't want advisers doing additional work that results in more compensation, because that creates conflicts, so they're trying to eliminate the conflicts.”

Experts are certain that the proposal, which is open for comment through May 5, will be approved.

“My question to the end-adviser is, are you in the plan for the game of rollover capture and cross-selling or are you in it because you want to provide investment advice to the plan?” asked Jason C. Roberts, partner at Reish & Reicher, a law firm that specializes in the Employee Retirement Income Security Act of 1974. “Some reps may be giving advice in an unlevel compensation situation, and this regulation will highlight that.”

Few broker-dealer firms are willing to talk about their plans for dealing with the proposal should it become law. Many, including Raymond James Financial Services Inc., are still evaluating the proposal.

“Brokers are going to have to decide whether they're going to be fiduciaries to the plan or not, and if they're not going to be, then they're just going to be brokers, and not give advice,” said Marcia S. Wagner, managing director at The Wagner Law Group.

For broker-dealers that employ brokers, one of the major issues to be decided is which reps will be permitted or encouraged to act as plan fiduciaries and which will be required to remain as reps when dealing with retirement plans, including 401(k)s and individual retirement accounts.

The majority of small 401(k) plans — those with $5 million or less — are sold by brokers or advisers. Brokers who work with plan participants often encourage them to roll over their 401(k) assets into an IRA with the broker's firm upon retirement.

The dollar volume of rollover IRAs is expected to hit $266.7 billion this year and grow to $338.8 billion in 2014, according to data from Cerulli Associates Inc.

“We've been hearing from virtually all the major firms, and they're very cautious about taking this step,” said Louis S. Harvey, president and chief executive of Dalbar Inc., a research and consulting firm.

Some firms may offer computer model advice through reps and personalized advice through fiduciary advisers, he said.

Independent broker-dealers also are grappling with the issue.

Commonwealth Financial Network expects that most of its dually registered advisers will go the fee-based route.

“[Going fully fee-based] makes sense, because when you have to report and disclose revenue sharing, the cost and complications could outweigh the benefits,” said Amy Glynn, director of retirement consulting services at Commonwealth.

Executives at Cambridge Investment Research Inc. are discussing the proposed regulation with affiliated advisers, said spokeswoman Cindy Schaus, who added that it is too early to say how the firm would approach the proposed rules.

Advisers believe that the either or nature of the rule may harm smaller investors.

“People need advice and help — and this rule makes it harder to offer both,” said Stuart J. Pastrich, managing director of Compass Financial Group, an LPL-affiliated independent firm that manages $100 million in assets and does about 20% of its business in IRA rollovers.

“Fiduciaries are needed, but we can't work for free. There needs to be some kind of common ground,” he said.

“I have one foot in the transactional world and one in the advisory world,” said Moss J. Kaufman, president of Network Capital Services, which manages $50 million and is affiliated with Investacorp Inc. “Since I always put the client first, I'd have to give up some of my business to keep up with the ethics.”

Applying "fiduciary standard" to Series 65

Source: Haggling over the F word continues Registered Rep.com, August 19, 2009

Regulators, consumer advocates and politicians continue to hammer out what it might mean for Series 65 investment advisors and series 7 registered reps to adhere to the fiduciary standard, under the Obama administration's June plan for financial services regulatory overhaul. One of the biggest sticking points is, which fiduciary standard?

The Investor Protection Act of 2009, released by the Treasury Department on July 10, is the second draft of legislation that would implement some of the financial reforms outlined by the Obama administration in a June white paper. Among other things, the Act would authorize the Securities and Exchange Commission (SEC) to “harmonize” the regulation of investment advisers and broker-dealers and establish a fiduciary standard for both. In the language of the Act, it would require both types of financial advisors “to 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, when providing investment advice to retail customers or clients (or such other customers or clients as the SEC may determine).”

Currently, Series 65 investment adviser reps, who are regulated under the Investment Advisers Act of 1940, must adhere to the fiduciary standard, which requires that they put the interests of their clients before their own when selecting investments for those clients. But the Securities Industry and Financial Markets Association (SIFMA), would like any legislation to create a new standard called the “federal fiduciary” standard, according to a July 17 release.

"It won't matter who is giving the advice—broker or advisor—investors will be protected by the exact same federal fiduciary standard when receiving the same services,” says SIFMA President and CEO Timothy Ryan. Today, as is well known, series 7 registered reps, who are regulated under the Securities Exchange Act of 1934, are only required to select investments for their clients that are “suitable,” which gives them greater flexibility when it comes to price and other factors. Critics contend that creating a new fiduciary standard would likely mean watering it down.

SIFMA has also said publicly that the fiduciary standard should not apply to all of a financial advisor’s business activities; exceptions should be made, as there are times when broker-dealers offer services that Series 65 investment advisors do not, such as raising capital for business or brokering mergers and acquisition deals. When broker-dealers operate in such business areas, and when personalized advice is not involved, the suitability standard should apply instead, they say.

“I think the real question is are those people talking about ‘the’ fiduciary duty under the advisors act, or are they talking about something different and in SIFMA’s case it is very clear to me they are talking about something different, a new federal standard,” says David Tittsworth, executive director of the Investment Adviser Association (IAA). The IAA, together with the Certified Financial Planner Board of Standards (CFP Board), the Consumer Federation of America (CFA), the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the North American Securities Administrators Association (NASAA), fear the proposed language in the current act may fall short, if it does not extend the fiduciary duty of investment advisors to brokers. Tittsworth says the Act shouldn’t water down the current standard of fiduciary duty, a well established legal standard under the Investment Advisors Act of 1940.

“Fiduciary is just a word right now—this is a standard everyone should be held to and we accomplished something because we used this word,” says Eric Schwartz, founder of Fairfield Iowa independent b/d Cambridge Investment Research. However Schwartz says the industry has a long way to go towards explaining what it means. “It is a very murky area and my belief is that when they actually spell this out, regulations will have to be written for years to come after to determine what exactly it means in every case to be a fiduciary.”

Among other measures, The Investor Protection Act of 2009 would also empower the SEC to require that firms disclose to the nature of their relationship to clients, and to examine and ban forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest. Some critics say, however, that this is not enough, because it doesn’t specify specific kinds of compensation practices."

Frankel on fiduciary duties of securities professionals

Source: Fiduciary Duties of Brokers-Advisers-Financial Planners and Money Managers, by Tamar Frankel, Boston University School of Law

Broker dealers and investment advisers form the lifeline of the financial markets. While in the past their functions were separate, and their regulation differed, throughout the years their functions were allowed to merge but their regulation remained separate.

Advisers are their clients’ fiduciaries. Brokers are not, with some exceptions. It is recognized that the law has to change, and the question is how. In this Article I argue for imposing the fiduciary duty of loyalty and limiting conflict of interest all financial intermediaries, including broker dealers, and suggest a process for establishing the details of the law that should apply to them.

  • Section One of the Article outlines the principles on which fiduciary law is based.
  • Section Two offers a short overview of the past and current practice of broker dealers. *Section Three highlights the fiduciary aspects of broker dealers and the risks posed to their clients from their conflicts of interest
  • Section Four proposes changes in the current law and a process to achieve future changes.

The law should impose principles; the financial intermediaries should seek the specificity.

FINRA's bank broker-dealer proposal

Bankers and Brokers and Bricks and Clicks: an Evaluation of FINRA’s Proposal to Modify the 'Bank Broker-Dealer Rule, by Jill Gross, Pace Law School, and Edward Pekarek, Pace Law School, was recently posted on SSRN.

Here is the abstract:

This article evaluates the Financial Industry Regulatory Authority’s (FINRA) proposal to adopt a modified version of NASD Rule 2350, known as the “bank broker-dealer rule,” which, if approved by the SEC, would be designated as FINRA Rule 3160 within FINRA’s Consolidated Rulebook (the proposed rule change).

The proposed rule change ostensibly seeks to prevent FINRA member firms, who offer broker-dealer products and services through contractual “networking arrangements” with financial institutions – both on and off the premises of those institutions – from undertaking certain business practices that might tend to confuse or harm financial institution customers.

The proposed rule change also aims to prevent customer confusion by, inter alia, ensuring that certain disclosures are made to affected customers so they can understand and appreciate the distinction(s) between the financial institution’s products and services and those sold by the broker-dealer affiliate.

Financial planners say fiduciary debate may favor brokers

Source: Financial Planners Say Fiduciary Debate May Favor Brokers Bloomberg, August 7, 2009

Government efforts to force stock brokers who give investment advice to follow a fiduciary standard may end up watering down the rule, according to a financial planners group.

“From the perspective of regulation, the big issue now is how you define fiduciary,” said Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors, which is based in Arlington Heights, Illinois. Broker-dealers, she said, may try to redefine the word. “What that really means is pulling the current fiduciary standard down.”

The U.S. Securities and Exchange Commission has allowed brokerages to offer limited advice on fee-based accounts, as long as the information was part of its business of buying and selling securities, under rules that are set to expire this year. President Barack Obama sent legislation to Congress July 10 that would allow the SEC to apply a similar standard of legal responsibility in putting clients’ interests first to broker- dealers and registered investment advisers.

There were approximately 1 million fee-based brokerage accounts worth $300 billion as of May, 2007, according to the SEC.

“There’s going to be a chasm between the current standard for registered investment advisers and what will apply to brokers,” said Bill Singer, a securities lawyer at New York- based Stark & Stark, who edits the Wall Street blog Broke and Broker. “I’m not sure we’re all talking about the same ‘F’ word.”

Minimize Conflicts

“What worries me today is there’s now huge pressure to revise regulations,” said Harold Evensky, of Evensky & Katz, a financial advisory firm in Coral Gables, Florida. “The brokerage industry sees this as an opportunity to accomplish what they couldn’t accomplish before” in drafting the legislation to their benefit, he said.

Evensky is a member of an informal group called the Committee for the Fiduciary Standard, made up of advisers, financial planners and pension and insurance consultants. They met July 29 with SEC commissioners, congressional staff and an official at the U.S. Treasury, to lobby for rules that put the client’s best interest first and minimize conflicts of interest.

The Securities Industry Financial Markets Association, Wall Street’s main lobbying group, changed a longstanding position to call for a fiduciary standard that applies to brokers and investment advisers in testimony July 17 before the House Financial Services Committee.

Supersede State Laws

At the hearing, Sifma said the standard should supersede existing state laws, which have been “unevenly developed and applied over the years.” Conflicts of interest should be managed through “clear, unambiguous disclosure,” the Washington-based group said.

The federal rules should recognize and preserve “product and service innovation,” and they should only be applied “in the context of providing personalized investment advice,” Sifma said.

The timetable for adoption depends on Congress, which is considering the changes as part of a larger financial-regulatory overhaul.

Ron Rhoades, chief compliance officer at Joseph Capital Management LLC, an investment advisory firm in Hernando, Florida, called the Sifma statement a “wolf in sheep’s clothing.”

Sign Away Standards

“Under one interpretation of Sifma’s proposal, Wall Street firms could have their customers sign away the fiduciary standards of conduct by simply signing a lengthy, incomprehensible, multipage, small-print agreement,” Rhoades wrote in an article published in Advisor Perspectives, a Web site for investment advisers.

Brokerage firms and mutual-fund companies would be among the big winners if the fiduciary standard follows Sifma’s interpretation, Rhoades said, because they could continue to sell their products with fewer changes. A “bona-fide” fiduciary standard will lower fees from increased competition, while brokerages and investment-adviser firms may see higher regulatory-compliance costs, he said.

Brokerage houses provide a much broader range of services beyond individual investment advice, and regulation needs to reflect that, said Sifma spokesman Travis Larson. The industry wants to continue to raise capital for businesses, cities and states, as well as providing liquidity in the marketplace.

Brokers Outnumber Advisers

There are about 4,850 regulated brokerage firms and 649,000 brokers, according to the Financial Industry Regulatory Authority Web site. The average registered investment-adviser firm, typically made up of between one and 10 employees, manages $200 million to $250 million in assets, according to an October report from Citigroup Global Markets. Industry wide, there is about $2.4 trillion under management by 10,000 to 15,000 advisers, the report said.

“We want a federal fiduciary standard,” Sifma’s Larson said. “We want as the foundation of that definition the very definition that President Obama used: putting the client’s interest first. Full stop.”

Obama’s plan to have the SEC settle the issue may not satisfy consumer advocates.

“Our concern has always been that if the SEC were to decide what the fiduciary duty is, it would lower the standard in order to accommodate broker business practices,” said Mercer Bullard, founder and chief executive officer of Fund Democracy LLC, an advocacy group based in Oxford, Mississippi.

SEC rules allow brokers to act as fiduciaries and commission-based salesmen at different times in their relationships with clients, Bullard said."

States want more authority over investment advisors

The following is a statement from North American Securities Administrators Association President and Texas Securities Commissioner Denise Voigt Crawford calling for Congress to increase the regulatory responsibility of state securities regulators over investment advisers:

“States have both the will and the ability to regulate. The state system of investment adviser regulation has worked well with the $25 million threshold since it was mandated in 1996. The states have developed an effective regulatory structure and enhanced technology to oversee investment advisers. Increasing the threshold to $100 million would reduce the SEC’s examination burden and allow the agency to focus on larger firms and other market issues. “Government never has enough resources to do everything, but it’s clear that states have done a much better job at deploying their limited resources. States are ready to accept this increased responsibility.”

UK "Retail Distribution Review"

"The Retail Distribution Review (RDR) is one of the core strands of our retail market strategy. It complements our aims to improve financial capability and further ensures firms deliver fair outcomes for consumers. It is essential for promoting a resilient, effective and attractive retail investment market. The RDR will modernise the industry, giving more consumers confidence and trust in the market at a time when they need more help and advice with their retirement and savings planning.

We have used the RDR to address the root causes of some long-term problems1 with how the market operates, and at the same time to prepare the market for the future. In doing this, we have taken a different approach than with previous policy initiatives.

Over the past two and a half years, we have sought input from a wide range of industry practitioners, consumer representatives and other stakeholders to get their views on the issues to be addressed and to identify potential solutions.

Elements of fiduciary duty

The fiduciary duty is a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary.

One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment.

In a fiduciary relation one person justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

A fiduciary duty[1] is the highest standard of care at either equity or law.

A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.

In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of equity historically based in England's Court of Chancery with the courts of common law, and as a result the concept of fiduciary duty also became usable in common law courts.

When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent.

A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."

Fiduciary duty in different jurisdictions

Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation, more so than American law, while Australian law and British law have developed more conservative approaches than either the USA or Canada.

The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction.

Fiduciary relationships

The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legal—i.e., common law—owner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress his own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner.

Others, such as corporate directors, may be held to a fiduciary duty similar in some respects to that of a trustee.

This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of his ward's property. A person in a sensitive position sometimes protects himself from possible conflict of interest charges by setting up a blind trust, placing his financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling.

The fiduciary functions of trusts and agencies are commonly performed by a trust company, such as a commercial bank, organized for that purpose. In the United States, the Office of Thrift Supervision (OTS), an agency of the US Treasury, is the primary regulator of the fiduciary activities of federal savings associations.

When a court desires to hold the offending party to a transaction responsible so as to prevent unjust enrichment, the judge can declare that a fiduciary relation exists between the parties, as though the offender were in fact a trustee for the partner.

Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these:

  • Trustee/beneficiary: Keech v Sandford(Ref - Keech)
  • Conservatorship and legal guardians / wards
  • Agents, brokers and factors / principals: McKenzie v McDonald(Ref - Mckenzie)
  • Buyer agency agreement| Buyer agent (real estate broker) / buyer client
  • Confidential advisor including financial adviser and investment advisor / advisee or client
  • Lawyer/client: Sims v Craig Bell & Bond(Ref - Sims
  • Executors and administrators / legatees and heirs
  • Corporate partners, joint adventurers, directors and officers / company and stockholders: Guth v. Loft Inc., In Plus Group Ltd v. Pyke, Peoples Department Stores Inc. (Trustee of) v. Wise, Regal (Hastings) v Gulliver
  • Board of directors / company: Re Saul D Harrison & Sons plc, Woolworths Ltd v Kelly(Ref - Woolworths)
  • Partner/partner: Chan v Zacharia (Ref - Chan), Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd,(Ref - Fraser) Meinhard v. Salmon
  • Majority/minority stockholders
  • Stockbroker/client: Hodgkinson v Simms (Ref - Hodgkinson)
  • Senior employee / company: Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (Ref - Green)
  • Retirement plan administrators (including 401(k) plans) / retirees and workers: Vivien v. Worldcom
  • Promoters / stock subscribers
  • Liquidator/company: Re Pantmaenog (Ref - Pantmaenog)
  • Mutual savings banks and investment corporations / their depositors and investors
  • Receivers, trustees in bankruptcy and assignees in insolvency/creditors
  • Governments / indigenous peoples: R. v. Sparrow, Seminole Nation v. United States

Roman and civil law recognized a type of contract called fiducia (also contractus fiduciae or fiduciary contract), involving essentially a sale to a person coupled with an agreement that the purchaser should sell the property back upon the fulfillment of certain conditions.[2]

Such contracts were used in the emancipation of children, in connection with testamentary gifts and in pledges. Under Roman law a woman could arrange a fictitious sale called a fiduciary coemption in order to change her guardian or gain legal capacity to make a will.[3]

In Roman Dutch law, a fiduciary heir may receive property subject to passing it to another on fulfillment of certain conditions; the gift is called a fideicommissum. The fiduciary of a fideicommissum is a fideicommissioner and one that receives property from a fiduciary heir is a fideicommissary heir.[4]

Fiduciary principles may be applied in a variety of legal contexts.[5]

Possibly fiduciary relationships

Joint ventures, as opposed to business partnerships, are not presumed to carry a fiduciary duty; however, this is a matter of degree. (Ref - United) If a joint venture is conducted at commercial arm's length and both parties are on an equal footing then the courts will be reluctant to find a fiduciary duty, but if the joint venture is carried out more in the manner of a partnership then fiduciary relationships can and often will arise. (Arklow vs. MacLean Privy Council 1999)

Husbands and wives are not presumed to be in a fiduciary relationship; however, this may be easily established.

Similarly, ordinary commercial transactions in themselves are not presumed to but can give rise to fiduciary duties, should the appropriate circumstances arise. These are usually circumstances where the contract specifies a degree of trust and loyalty or it can be inferred by the court. (Ref - Surgical)

A protector of a trust may owe fiduciary duties to the beneficiaries, although there is no case law establishing this to be the case. (Ref - Idaho)

Elements of fiduciary duty

A fiduciary, such as the administrator, executor or guardian of an estate, may be legally required to file with a probate court or judge a surety bond, called a fiduciary bond or probate bond, to guarantee faithful performance of his duties.[6]

One of those duties may be to prepare, generally under oath, an inventory of the tangible or intangible property of the estate, describing the items or classes of property and usually placing a valuation on them.[7]

A bank or other fiduciary having legal title to a mortgage may sell fractional shares to investors, thereby creating a participating mortgage.

Accountability

A fiduciary will be liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means: (Ref - Chan2)

  • In circumstances of conflict of duty and interest
  • In circumstances of conflict of duty to one person and duty to another person
  • By taking advantage of the fiduciary position.

Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.

Conflict of duty and care

A fiduciary's duty must not conflict with another fiduciary duty. (Ref - Stewart) Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent, represent more than one client, and the interests of those clients conflict. This would occur when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal's interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.

No-profit rule

A fiduciary must not profit from the fiduciary position. (Ref - Keech2) This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of his role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal consents then the fiduciary may keep the benefit. If this requirement is not met then the property is deemed by the court to be held by the fiduciary on constructive trust for the principal.

Secret commissions, or bribes, also come under the no profit rule. The bribe shall be held in constructive trust for the principal. The person who made the bribe cannot recover it, since he has committed a crime. Similarly, the fiduciary, who received the bribe, has committed a crime. Fiduciary duties are an aspect of equity and, in accordance with the equitable principles, or maxims, equity serves those with clean hands. Therefore, the bribe is held on constructive trust for the principal, the only innocent party.

Bribes were initially considered not to be held on constructive trust, but were considered to be held as a debt by the fiduciary to the principal. (Ref - Lister) This approach has been overruled; the bribe is now classified as a constructive trust. (Ref - attorney) The change is due to pragmatic reasons, especially in regard to a bankrupt fiduciary. If a fiduciary takes a bribe and that bribe is considered a debt then if the fiduciary goes bankrupt the debt will be left in his pool of assets to be paid to creditors and the principal may miss out on recovery because other creditors were more secured. If the bribe is treated as held on a constructive trust then it will remain in the possession of the fiduciary, despite bankruptcy, until such time as the principal recovers it.

Breaches of duty and remedies

Conduct by a fiduciary may be deemed constructive fraud when it is based on acts, omissions or concealments considered fraudulent and that gives one an advantage against the other because such conduct—though not actually fraudulent, dishonest or deceitful—demands redress for reasons of public policy.[8]

Breach of fiduciary duty may occur in insider trading, when an insider or a related party makes trades in a corporation's securities based on material non-public information obtained during the performance of the insider's duties at the corporation.

Breach of fiduciary duty by a lawyer with regard to a client, if negligent, may be a form of legal malpractice; if intentional, it may be remedied in equity. Clark v Rowe, 428 Mass. 339, 345 (1998) (dicta).

Where a principal can establish both a fiduciary duty and a breach of that duty, through violation of the above rules, the court will find that the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable to allow the fiduciary to retain the benefit by employing his strict common law legal rights. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary's course of action.

Remedies will differ according to the type of damage or benefit. They are usually distinguished between proprietary remedies, dealing with property, and personal remedies, dealing with pecuniary (monetary) compensation.

Constructive trusts

Where the unconscionable gain by the fiduciary is in an easily identifiable form, such as the recording contract discussed above, the usual remedy will be the already discussed constructive trust. (Ref - Giumelli)

Constructive trusts pop up in many aspects of equity, not just in a remedial sense, (Ref - Muchinski) but, in this sense, what is meant by a constructive trust is that the court has created and imposed a duty on the fiduciary to hold the money in safekeeping until it can be rightfully transferred to the principal.

Account of profits

An account of profits is another potential remedy. (Ref - Dart) It is usually used where the breach of duty was ongoing or when the gain is hard to identify. The idea of an account of profits is that the fiduciary profited unconscionably by virtue of the fiduciary position, so any profit made should be transferred to the principal. It may sound like a constructive trust at first, but it is not.

An account for profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company on the side and has run up quite a lot of profits over a period of time, profits which he wouldn't have been able to make without his fiduciary position in the original company. The calculation of profits in this sense can be extremely difficult, because profit due to fiduciary position must be separated from profit due to the fiduciary's own effort and ingenuity.

Compensatory damages

Compensatory damages are also available.(Ref- Nocton) Accounts of profits can be hard remedies to establish, therefore, a plaintiff will often seek compensation (damages) instead. Courts of equity initially had no power to award compensatory damages, which traditionally were a remedy at common law, but legislation and case law has changed the situation so compensatory damages may now be awarded for a purely equitable action.

Australia announces reforms to financial advice standards

  • Source: OVERHAUL OF FINANCIAL ADVICE Australian Government, Chris Bowen, Minister for Human Services, Minister for Financial Services, Superannuation and Corporate Law, April 26, 2010

The Rudd Government is today announcing reforms to financial advice that will improve the trust and confidence of Australian retail investors in the financial planning sector.

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, said that the Future of Financial Advice reforms are designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis‑selling of financial products that culminated in high profile corporate collapses such as Storm Financial, Opes Prime, and Westpoint.

These reforms are the Government's response to the Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia.

"Australia is facing the challenge of an ageing population. Access to quality advice remains an important part of planning for the future," Mr Bowen said.

"These reforms will see Australian investors receive financial advice that is in their best interests, rather than being directed to products as a result of incentives or commissions offered to the financial adviser.

"ASIC's powers to act against unscrupulous operators will also be strengthened and professional standards for advisers will be reviewed by an expert advisory panel."

The Future of Financial Advice package includes the following:

  • A prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans. The measure does not initially apply to risk insurance.
  • The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients, subject to a 'reasonable steps' qualification, and to place the best interests of their clients ahead of their own when providing personal advice to retail clients.
  • Increasing transparency and flexibility of payments for financial advice by introducing 'adviser charging' that will help align the interests of the financial adviser and the client; is clear and product neutral; and where the investor will be able to opt in to the advice in response to a compulsory, annual renewal notice.
  • Percentage-based fees (known as assets under management fees) will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor.
  • Expanding the availability of low-cost 'simple advice' to provide access to and affordability of financial advice.
  • Strengthening the powers of the Australian Securities and Investments Commission (ASIC) to act against unscrupulous operators.
  • The examination of a statutory compensation scheme by Mr Richard St John, who has significant corporate law experience.

The majority of these reforms will commence from 1 July 2012 and the Government will consult with industry on the implementation of the reforms.

"The expansion in the provision of low-cost, simple advice will be of particular benefit to individuals and families who may not currently have access to financial advice," Mr Bowen said.

Furthermore, the Government's progress on simple disclosure for investors and financial literacy will better enable individuals to understand, and therefore benefit from, the advice they receive.

"I welcome the significant efforts of industry, including the Investment and Financial Services Association (IFSA) and the Financial Planning Association (FPA) to remove commissions and improve professional standards. These reforms clearly support their efforts."

A summary of the Government's response to the PJC Inquiry and additional reforms is at Attachment A.

Attachment B provides an overview of the fees that can no longer be charged under the ban on conflicted remuneration structures.

26 April 2010

Australia issues "Wholesale and Retail Options Paper"

1. INTRODUCTION

1.1 As part of the Future of Financial Advice (FOFA) reforms, the Government announced that it would consider the appropriateness of the distinction between wholesale and retail clients (also referred to as ‘investors’ in this paper) is appropriate. The Corporations Act 2001 establishes a regulatory framework which distinguishes between retail, wholesale, sophisticated and professional investors. Section 761G(4) states that a financial product is only provided to a person as a wholesale client if it is not provided to the person as a retail client. Insurance and superannuation are treated differently, but investors in other financial products can be treated as wholesale clients if they satisfy a wealth, occupational or other threshold test.

1.2 Problems with the definition of wholesale client were exposed during the recent global financial crisis (GFC) as clients who did not have the necessary experience investing in complex financial products were able to access these on the wholesale market. Internationally there are moves to clarify the treatment of retail and wholesale clients, including new definitions. The International Organisation of Securities Commissions has conducted a survey on international practices which provides a good evidence base for considering new definitions.

1.3 This paper will consider the appropriateness of the distinction between wholesale and retail clients in light of recent experience. As it is relatively easy to satisfy the wealth test in sections708(8)(c) and s761G(7)(c), given the appreciation of assets and current levels of household wealth compared to when this test was originally introduced, it may be appropriate to reconsider how we distinguish between retail and wholesale clients. Accordingly this paper will pose a number of questions and propose draft options for further consideration.

1.4 The scope of this paper does not extend to considering the present distinction between wholesale and retail clients with regard to insurance contracts. This will be considered in greater detail as part of the review of risk insurance during the FOFA review.

FSA Retail Distribution Review

The Financial Services Authority (FSA) has today published proposals for enhancing the professionalism of investment advisers under the Retail Distribution Review (RDR).

The RDR is seeking to rebuild people’s trust and confidence in the retail investment market by raising standards of professionalism. A key element of the FSA’s wide-ranging reforms is that by the end of 2012, advisers, whether independent or restricted, will need to demonstrate greater knowledge and skills and meet enhanced standards in dealing with clients.

The FSA is proposing to create a new in-house governance structure to ensure advisers achieve this greater level of professionalism, both initially and on an ongoing basis through the achievement of new, higher level qualifications; meeting enhanced standards of continuing professional development; and adhering to common ethical standards.

This streamlined approach fits with the FSA’s existing role in approving and supervising investment advisers, and would enable the FSA to apply its more intensive supervisory approach, including its greater focus on individuals in key positions, to the retail investment advice sector. At the same time, the FSA is proposing that professional bodies, registered with and overseen by the FSA, should play a greater role in helping their members meet its new professionalism requirements.

The FSA has also clarified a number of important issues about the new level of qualification investment advisers will need to meet by the end of 2012. In particular, it has published a list of qualifications that advisers may already hold or be studying towards, with the guarantee that should they hold one of these qualifications they will not need to take further exams once the content for meeting the new qualification standard is confirmed. Instead, advisers are able to meet any gaps through on-the-job continuing professional development.

Sheila Nicoll, the FSA’s director of conduct policy, said:

"Raising professional standards is a core strand of our reforms of the retail investment market. Through this, people will come to expect the same level of professionalism from investment advisers as they do from other professions. We will closely supervise the necessary improvement in standards that we are seeking to bring about which, along with the other aspects of the RDR, will come into force from the beginning of 2013.

"We have always said that the RDR’s proposals are an opportunity for firms to modernise their practices and to put the interests of their customers first. We have responded to industry feedback and are giving advisers more certainty about what they need to do by clarifying important points on qualifications. Advisers need to consider how the changes will impact on them and how they need to respond – now is the time to act."

In addition, the FSA has set out proposals for removing commission bias from the group personal pension (GPP) market by ensuring that employers will be able to agree up-front how much investment advice will cost them and how they will pay for it. The FSA has also set out its views on the extent to which it may be appropriate to apply the RDR’s proposals to pure protection products and invites views on extending higher professional standards to pure protection advice.

The FSA is inviting responses to its proposals by 16 March 2010.

Notes for editors

Consultation paper CP09/31: ‘Delivering the Retail Distribution Review: Professionalism; Corporate pensions; and Applicability of RDR proposals to pure protection business’. To help investment advisers understand the proposals it has published today, including what is required of them to meet the 2012 qualifications deadline, the FSA has published a factsheet and information on its small firms’ website.

The Financial Services Skills Council (FSSC) is currently consulting on the exam standards that will meet QCF Level 4 (the new, higher level of qualification that investment advisers will need to hold to be able to give advice once the RDR comes into effect). It is expected that the FSSC will publish the final standards in March 2010. Further information is available on the FSSC website.

In June 2009, the FSA published consultation paper CP09/18: 'Distribution of retail investments: Delivering the RDR'.

The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

References

Notes
  1. (Ref - definition) Bristol & West Building Society v Mothew [1998] Ch 1 at 18 per Peter Millett, Baron Millett
  2. (Ref - crowd) Meinhard v. Salmon (1928) 164 NE 545 at 546
  3. (Ref - loyalty) ASIC v. Citigroup [2007] 62 ACSR 427 at 289
  4. (Ref - Keech) Keech v Sanford [1558-1774] All ER Rep 230
  5. (Ref - Woolworths) (1991) 22 NSWLR 189
  6. (Ref - Sims) [1991] 3 NZLR 535
  7. (Ref - Fraser) [1988] 2 Qd R 1
  8. (Ref - Chan) Kak Loui Chan v. John Zacharia (1984) 58 ALJR 353
  9. (Ref - Mckenzie) [1927] VLR 134
  10. (Ref - Hodgkinson) [1994] 3 SCR 377
  11. (Ref - Green) [1982] WAR 1
  12. (Ref - Breen) (1996) 186 CLR 71
  13. (Ref - Paramasivam) [1998] 1711 FCA
  14. (Ref - United) United Dominions Corporation v Brian Pty Ltd (1985) 59 ALJR 676
  15. (Ref - Surgical) United States Surgical Corporation v Hospital Products International Pty Ltd (1984) 58 ALJR 587
  16. (Ref - Chan2) Note 6
  17. (Ref - Phipps) Phipps v Boardman [1967] 2 AC 46
  18. (Ref - Stewart) Stewart v Layton (1992) 111 ALR 687
  19. (Ref - Canada) Note that Canada is the only common law jurisdiction in the world that recognises the doctor/patient relationship as a fiduciary one.
  20. (Ref - McInerney) McInerney v. MacDonald [1992] 2 SCR 138, (1992) 126 N.B.R. (2d) 271, (1992) 126 N.B.R. (2e) 271, (1992) 93 D.L.R. (4th) 415, 1992 CanLII 57 (S.C.C.)
  21. (Ref - Lister) Lister v Stubbs (1890) 45 Ch D 1
  22. (Ref - Attorney) Attorney General (Hong Kong) v Reid [1993] 3 WLR 1143
  23. (Ref - Giumelli) Giumelli v Giumelli (1999) 73 ALJR 54
  24. (Ref - Muchinski) Muchinski v Dodds (1986) 60 ALJR 52
  25. (Ref - Dart Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101
  26. (Ref - Nocton) Nocton v Lord Ashburton [1914] AC 932
  27. (Ref - Pantmaenog) Re Pantmaenog (2004) 1 AC 158
  28. (Ref - Glover) Glover v Porter-Gaud (2000) 98-CP-10-613
  29. (Ref - Idaho) Although under the laws of Idaho it seems to be assumed that a protector is a fiduciary.[9] Murray Gleeson

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