Should Broker-Dealers be Fiduciaries?

Although not a new topic, the issue of broker-dealers and their fiduciary duties to their clients does seem to be picking up steam as of late.  The Dodd-Frank Act empowered the Securities and Exchange Commission (“SEC”) to enact a uniform fiduciary standard for broker-dealers and investment advisors in July 2010 and the SEC has been working at a snail’s pace on the issue ever since.  Currently, registered investment advisors are governed by the Investment Advisors Act of 1940 and are considered to be fiduciaries to their clients.  Broker-dealers, on the other hand. are governed by the Securities Exchange Act of 1934 and are not held to the same standards as investment advisors.  The SEC is still analyzing information and may develop proposed rules that would harmonize the requirements of the broker-dealers with those of the investment advisors.  While the SEC has been slow to make any proposed rules without significant data and analysis, the Department of Labor (“DOL”) seems to be trying to move this issue along much faster.

The DOL is looking to release a second notice of proposed rulemaking in the coming months that would broaden the definition of fiduciary for those that provide advice for a fee to retirement accounts.  The push for revisions comes from the DOL attempting to catch up ERISA rules that were written in 1975 with the current investment industry.  The proposed rules would require broker-dealers to act as fiduciaries when dealing with retirement accounts and would eliminate selling commission products to such accounts.  Investment Advisors could also see significant impact from the proposal.  Under the current SEC rules, advisors are allowed to have conflicts of interest, as long as it is disclosed to the client.  Under the DOL’s rules, any conflict would be prohibited.  Lobbyists are pushing to get exemptions included into the rules that would protect the current broker-dealer compensation method and allow for conflicts.

The DOL originally issued proposed rules in 2011 and after significant backlash from the public, including members of Congress, withdrew the proposal and announced that it would re-propose its rule in the future.  Opponents of the DOL’s rules believe they should work in conjunction with the SEC or wait for the SEC proposed rules to be released.  A current bill in the House may force the DOL to do just that.  The bill, as written, would require the DOL to wait to publish its rule for 60 days after the SEC issues its proposal.  Currently, the SEC does not plan to issue any such rules before the end of 2013.