fiduciary or not? a "Bait and Switch" game

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed Oct 28, 2020 9:50 am ... ules-iiac/

Exempt IIROC, MFDA firms from title rules: IIAC

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Industry raises concerns with proposed standards for advisor, planner titles

By: James Langton October 27, 2020 12:12
rules and regulations

The Investment Industry Association of Canada (IIAC) says investment dealers and fund dealers that are already under self-regulatory organization oversight should be exempted from new titling rules proposed by the Financial Services Regulatory Authority of Ontario (FSRA).

The FSRA is consulting on proposed minimum proficiency standards for reps to use the “financial planner” and “financial advisor” titles.

In a submission to the FSRA, the IIAC said it supports the objective of providing investors with greater clarity about the qualifications of self-titled planners, but it also questioned some of the FSRA’s proposed standards and whether the title restrictions would extend to other commonly used titles.

“For example, would titles such as ‘investment advisor’ and ‘securities advisor’ or ‘estate planner’ and ‘financial planning consultant’ reasonably be confused with, respectively, the financial advisor or financial planner title?” the IIAC asked in its submission.

The group recommended the FSRA consider exempting both investment dealers and fund dealers from its requirements.

“FSRA has stated its commitment to avoid duplicative oversight and unnecessary regulatory burden on market participants, yet this framework will do exactly that for SRO registrants,” it said in its submission.

“The SROs, with the mandate of protecting investors and the integrity of the Canadian capital markets, have rigorous proficiency requirements and business and financial conduct oversight of their registrants,” it said.

As a result, it said the FSRA should consider an exemption for both IIROC and MFDA firms.

The deadline for the FSRA’s consultation is Nov. 12.


Advocate comment: the relevance of this article by an industry funded trade mag, is that it is another example of the slow public grind, which takes place over years and decades, designed to fool society into belief of a “trusted fiduciary advisER” (spelling trick emphasized in caps) when what nearly every retail investor gets is a commission sales rep, (deliberately spelled AdvisOR to skirt the legislation*) working for his dealer’s interests, while pretending to work for the client’s interest.

It is an example of one of the best “bait and switch” schemes in the world, used to harvest the trust and the money of millions of investors. ... ules-iiac/

* I say that the spelling of the 90-day training role of commission sales agent (Dealing Representative) is deliberately mis-spelled, and that this is known and intentional for several reasons:

1. It is true that there are two possible ways to spell the word “adviser”, and it is fairly simple to search legislation to determine which spelling is used in law, and which is used in the commission sales of investment products. They are not the same. One is legal and the other is not.

2. Securities Commissions (and the CSA) in Canada (and the USA, FINRA etc) have all admitted and published in writing the fact that “Adviser and Advisor” are not the same thing with the same meaning in securities law.

3. It working perfectly, if the intent is to , an its continued repetitive coverup is accomplished by thousands of industry trade mag articles, etc., like this one, designed to spin the public perception/belief in a certain direction, using misdirection, obfuscation and deception.

4. It is a con, the work of #FarmingHumans and of the millions of well paid handmaids who assist in this task. Shame on us all for accepting lowest common denominator ethical standards, and thus building a society so fragile and unstable as to be unable to withstand the truth. It is like watching a super-slow-motion video of some catastrophe, with scenes of the countless small steps and missteps, interspersed with scenes of the unintended disastrous consequences. Perhaps that is why I was so captivated by the Mad Max movies with Tina Turner.

Imagine a film project which was able to combine the social collapse, hunger, poverty and desperation of a Mad Max, or a Hunger Games world, with flashbacks between that world, and the countless small but meaningful steps, which all added up to the collapse of society.

It would be like creating something which combined the causations-story like done in THE BIG SHORT and the effects-story as seen in whichever dystopian example you prefer, Mad Maxx or Hunger Games.

In The Platform, the narrative begins with the compelling intro, “There are three types of people, those who are above those who are below, and those who fall...” The series, for Netflix, held out a fantastic promise of something interesting, and unfortunately it delivered more gore than I needed, but the hope for something real was inspired. I hope I can be inspired to carry on with this thought experiment, feels interesting.


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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Aug 14, 2020 12:42 pm ... 57426.html

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New E-Book Urges Investors To Find A Fiduciary Advisor

The Institute for the Fiduciary Standard announced this morning it published a new e-book designed to help advisors educate consumers and clients on the benefits of working with a fiduciary.

The new guidance aims to explain how professionals who are registered investment advisors are held to higher legal responsibilities and a higher degree of loyalty and client-first service.

The guidance also promotes the Institute’s Real Fiduciary practices and RIAs that have sworn to uphold the Institute’s code of ethics.

“The guidance seeks to reverse decades-long efforts by regulators to first obfuscate adviser and broker differences, and then to blame investors for being “confused,”

Institute President Knut Rostad said in an interview.

“Conventional wisdom says the problem is investors, and finding a fiduciary is complicated and investors should rely on what advisors say. This is backwards. Finding a fiduciary is straight-forward. Investors relying on common sense and what brokers and advisers actually do will succeed,”
Rostad said.

According to Rostad, the new e-book also seeks to fill the fiduciary void left by the new Securities and Exchange Commission and pending U.S. Department of Labor standards which Rostad claims still leave investors vulnerable to costly conflicts of interest.

“The new industry standards fail to discuss broker-dealers’ duties to distribute products and their dependence on conflicted product sales,” he said. “Also, brokers’ inability to provide cost estimates up front or actual costs afterwards keeps customers blind about what they pay and brokers’ firms make.”

Instead, the book stresses that investors should only hire those advisors who commit to these “commonsense principles” and are willing to mitigate or fully disclose unavoidable conflicts. The principles are:

• Being loyal. Only accepting compensation from clients.

• Avoiding conflicts – if at all possible -- like a deadly virus.

• Fully disclosing all fees clients pay and that firms earn.

• Putting disclosures and agreements in plain language writing.

According to the Institute for the Fiduciary Standard, mitigating material conflicts means, “at minimum, receiving appropriate client consent in writing before executing the recommendation” and only after explaining the conflict both orally and in writing to clients in a manner that highlights any additional compensation the advisor receives as a result of a recommendation.

Real Fiduciary advisors are also required to document and be prepared to demonstrate that conflicted advice remains “reasonable and fair and consistent with the client’s best interest.”

An advisor can explain his or her compensation in a few sentences, the e-book states.

The e-book is available at ... -advisors/
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Tue Jul 07, 2020 8:33 pm

DOL Rule Would Expose Vulnerable Retirement Savers to Harmful Advice

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Pushers of High-Cost, High-Risk Financial Products Would Be Free to Siphon Billions of Dollars from the Retirement Accounts of Financially Vulnerable Workers and Retirees

On June 29th, the Trump Administration rolled out a new regulatory package for retirement investment advice that, if finalized, would allow brokers and insurers to siphon billions of dollars a year out of the retirement accounts of hard-working Americans, putting their ability to afford an independent and dignified retirement at risk.

The regulatory package from the Department of Labor (DOL) is a multi-pronged assault on Americans’ retirement security. It would:
 Make it much easier for financial firms to avoid any fiduciary responsibility when advising retirement savers about their retirement plan and IRA investments.
 Deprive retirement savers of critical protections when the risks and conflicts are
 Substantially weaken protections against conflicts of interest when the fiduciary
standard does apply.
 Render the standard unenforceable for IRA investors, leaving millions of retirement
savers without recourse when they are victims of harmful advice.

In short, the proposal is designed to preserve financial firms’ ability to place their own interests ahead of their customers’ interests and profit unfairly at their expense.

This is precisely what one would expect from Labor Secretary Eugene Scalia who, before coming to the Department of Labor, represented the brokerage and insurance interests whose practices are the subject of this rulemaking but who saw no need to recuse himself despite his significant conflicts of interest.

Conflicted Financial Firms Get an Easy Escape Hatch to Avoid Fiduciary Responsibility

As part of the regulatory package, the DOL reinstated a loophole-laden definition of fiduciary investment advice that financial professionals can easily exploit to provide conflict- driven retirement investment advice without being subject to the fiduciary duty that is appropriate to their advisory role.

Specifically, one-time recommendations, no matter how consequential, are carved out, because the definition only covers advice that is provided on a “regular basis.” For example, although it is quite common for workers to seek one-time professional advice about what to do with their 401(k) when leaving a job, that advice will typically not be covered.
Even when a firm does provide advice on a regular basis, they can still evade their fiduciary obligations by
claiming they never intended for their advice to serve as “a primary basis” for the retirement savers’ investment decision.

The result: Financial firms and their sales reps can act like they are providing high- quality, trustworthy advice when they are really providing conflict-driven sales recommendations that undermine retirement savers’ financial security.

Critical Protections are Stripped Away When They are Needed Most

Among the most consequential investment decisions retirement savers make is whether to roll their money out of a workplace retirement plan and into an IRA. Retirees are particularly vulnerable, as they may have limited opportunity to recover from a bad rollover decision. Meanwhile, financial firms eager to get their hands on the trillions of dollars held in workplace retirement accounts have a strong incentive to recommend rollovers.

The DOL pretends to extend new protections to rollover recommendations, but those protections only apply to rollovers where there is an ongoing advisory relationship. As a result, the only rollovers likely to be affected are those that are already covered by separate regulatory protections under the securities laws. When it comes to rollovers to non-securities, sold in a one-off sales transaction, the DOL standards will seldom if ever apply.

But this is precisely where the protections of a fiduciary standard are needed most. Non-securities, including certain annuities, commodities, and real estate, are among the most complex, opaque, illiquid, and costly investments sold to retail investors. They are typically sold subject to some of the most toxic compensation conflicts and the weakest sales standards. Instead of looking for ways to protect retirement savers from harm, the DOL gives these transactions a regulatory free pass.
Because of this loophole, sellers of these products can advise retirement savers to take a lifetime of hard-earned savings and plunge it into a high-cost, low-quality investment that saddles the retirement saver with excessive risks and substandard returns, unimpeded by the DOL rule. Workers and retirees will lose billions from their retirement nest eggs as a result.

It Would Expose Retirement Savers to Advice that is Tainted by Conflicts of Interest

In addition to re-opening loopholes in the definition of fiduciary investment advice, which the DOL did through a final rule, the Department is also proposing a new rule to permit conflicted compensation when the fiduciary standard does apply.

The proposal does little to protect retirement savers from advice tainted by conflicts. Specifically, the exemption would allow all forms of conflict-laden, transaction-based compensation subject only to conditions modeled on the vague and weak requirements in the Securities and Exchange Commission’s “Regulation Best Interest.”

The SEC’s industry-friendly rule was opposed by investor advocates on the grounds that it creates a best interest standard in name only and provides only minimal protections to prevent conflicts from tainting recommendations. Best interest is undefined in the rule and has been interpreted by the SEC in a way that is indistinguishable from the suitability standard it
replaces. The obligation to “mitigate” conflicts is similarly vague, but it clearly continues to allow incentives that encourage and reward harmful advice. And the SEC defers to firms that strenuously opposed stronger protections to decide how to implement both the best interest standard and the obligation to mitigate conflicts.

The DOL now proposes to use this non-fiduciary standard as a substitute for the high fiduciary standard Congress adopted under ERISA to protect retirement plans and retirement savers from conflict-driven advice. This represents a huge and unwarranted watering down of that standard.

The Proposal Makes the Fiduciary Standard Unenforceable for IRA Investors
The proposal is explicit in stating that it provides IRA investors with no remedies when they are the victims of harmful advice. Since the DOL has no authority to enforce the fiduciary standard as it applies to IRAs, this would render the standard a mere mirage for millions of retirement savers who will be misled into relying on its supposed protections. When these vulnerable workers and retirees suffer financial harm as a result of conflicted advice unleashed by the rule, the rule would provide them with no recourse to redress that harm.
The Trump Administration is Trying to Rush Through the Proposal
With the backing of the financial industry, the Administration is attempting to rush through this anti-investor rule without an opportunity for the millions of Americans who will be affected by the relaxed standards to weigh in. It has reinstated the loophole-laden definition of fiduciary investment advice without even considering whether revisions are needed. For the proposed revision to the fiduciary standard itself, the DOL has provided only a 30-day comment period for a rule proposal with the potential to affect millions of retirement savers and trillions of dollars in retirement savings. That gross abuse of process isn’t driven by a compelling need to enact the proposed changes quickly. Instead, it reflects a cynical attempt by the DOL to get the rule enacted before a new Administration has a chance to weigh in.
With their retirement security on the line, workers and retirees need and deserve
retirement investment advice they can trust. The DOL proposal would instead expose them to conflicted sales recommendations dressed up as advice. It should be withdrawn in its entirety and a new rule proposed that protects workers and retirees, not the excess profits of well- heeled financial firms.
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Feb 21, 2020 3:19 pm

After Courts Kill a Federal Fiduciary Rule, Massachusetts Launches Its Own

Commonwealth officials will impose the new standard on brokers and agents who are licensed by Massachusetts
By Justin Baer and Jason Zweig
Feb. 21, 2020 1:55 pm ET

Massachusetts said it adopted new rules requiring brokers to act in their clients’ best interests, staking its claim as the first U.S. state to raise the bar on investor protections since a federal measure was struck down.

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Bill Galvin, Massachusetts's top securities regulator, said the state's fiduciary standard for broker-dealers will go into effect March 6 and will be enforced starting September 1.

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Massachusetts’s fiduciary standard for broker-dealers is final, the state’s Secretary of the Commonwealth Bill Galvin said Friday.
The new regulations, effective March 6 of this year, will place a standard of conduct on broker-dealers and their agents to provide investment advice and recommendations ‘without regard to the financial or any other interest of any party other than the customer’, according to a release from Galvin’s office.

In a statement, Galvin criticized the Securities and Exchange Commission (SEC) for failing to enact ‘a meaningful conduct rule to protect working families from abusive practices in the brokerage industry’ with its Regulation Best Interest (also known as Reg BI).
‘Enacting this rule will provide stronger protections for Massachusetts investors, by imposing a heightened duty of care and loyalty on broker-dealers and agents,’ he continued.

“Since the SEC has failed to enact a meaningful conduct rule to protect working families from abusive practices in the brokerage industry, it has been left to my office to apply a real fiduciary standard on broker-dealers and agents in Massachusetts,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. ... ved-188721

The division will begin enforcing the amended regulations on September 1, 2020, Galvin said.

Galvin first revealed preliminary plans for a fiduciary rule in the state on June 14 of last year, days after the SEC’s approval of Reg BI.
The amendments were proposed in December of 2019. The division took public written comments until January 7, 2020 and held a public hearing on that date. In all, the division received and reviewed about 682 written comments as well as oral testimony from 23 speakers.
Other states, including New Jersey and Nevada, have mulled their own fiduciary rulemaking initiatives in light of the SEC’s actions.
Brokerage industry representatives like the Securities Industry and Financial Markets Association (Sifma) have largely spoken out against states moving forward with their own rules.

Kenneth Bentsen, Sifma president and CEO, said in a statement: 'We look forward to reviewing the rule with particular attention on whether it is consistent with existing federal fiduciary and best interest standards to which our members are subject, or whether it may conflict in ways – whether intended or unintended – that would impede our members from best serving their retail clients.’

Knut Rostad, president of the Institute for the Fiduciary Standard, said that the Commonwealth's rule has a 'distinct fiduciary aroma' that broker-dealer lobbyists are sure to oppose and challenge in court.

'The slightest whiff of fiduciary conduct, especially avoiding or mitigating conflicts, sets off their protestations,' Rostad said in a statement. 'The words of wisdom of former SEC commissioner Robert Jackson should be recalled here: It’s "bullshit."'
See the adopted fiduciary standard regulations here.

“What’s left is a modest improvement on Regulation Best Interest but not the kind of tough standard needed to protect investors from conflicted advice,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “Backing down on ongoing [fiduciary] duty is particularly disappointing. We were thrilled to see Massachusetts step up, and now they’ve backed down.”

Failure to adhere to the fiduciary standard of utmost care and loyalty will be deemed a dishonest or unethical practice under M.G.L. c. 110A, § 204(a)(2)(G). In addition, the regulations will revise certain paragraphs in 950 CMR 12.204 to make clear that the existing suitability standard still applies to any relationships or transactions expressly excluded from the fiduciary standard ... option.htm

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Tue Jul 09, 2019 8:26 am

To me, Fiduciary means the highest standard, several hundred year old legal principle of “client first” professional treatment. Whereas the “suitability” standard is the financial equivalent of a “Dollar Store” product...where even junk is deemed “suitable to sell”...
Larry Elford

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Thanks Chris Carosa of the Fiduciary Institute for the following article about the state of Fiduciary matters in the industry:

With the SEC’s new Regulation Best Interest (“Reg BI”), the term “fiduciary” seems to have taken a back seat. But that may not mean what it appears. This may be a sign the market is growing weary of all things “fiduciary.” On the other hand, it may be that “fiduciary” has now become the de facto standard in a large portion of the marketplace.

Has “fiduciary” peaked? And, if so, when might that peak have occurred?

There are those that say “fiduciary” saw its acme just as the DOL unveiled its Conflict-of-Interest (a.k.a. “Fiduciary”) Rule. Some look fondly back at era in history. Others scorn it. Richard Reyes of The Financial Quarterback in Lake Mary, Florida, falls in this latter group. He says the “fiduciary” peak was “probably on or about 2016 when the Obama Administration was trying to shove the DOL ruling down the throat of the industry.”

But the DOL’s attempt to create a uniform fiduciary standard had a beginning and an end. Quite a few people look at the now vacated Rule’s demise as the crest of “fiduciary.” “The term peaked about a year ago, around the time the DOL’s ‘Fiduciary’ Rule died,” says Jeffrey Burg, Partner at DB Financial Partners in Phoenix, Arizona.

Modern science, however, provides the definitive answer. “The general public’s collective interest in Fiduciary peaked in early 2017 according to data from Google Trends and I would concur,” says Timothy Hooker, Investment Manager at Dynamic Wealth Solutions LLC in Southfield, Michigan. Indeed, a review of

Indeed, according to Google Trends, searches on the term “fiduciary” spiked to their highest levels the first week of February, 2017. It was on February 3, 2017 that President Trump issued a memo directing the acting Secretary of Labor to reevaluate the Obama DOL’s Fiduciary Rule. Ironically, the incoming Obama administration did the same thing to another DOL Rule promulgated during the waning months of the predecessor Bush administration.

What might explain the apparently ebbing interest in “fiduciary” over the last couple of years? Certainly, oversaturation could be cited as one reason.
“The term peaked because it was being used constantly in both the media and advertising,” says Burg, “but the majority of the public had no idea what it meant and they got tired of hearing it. Prospective clients roll their eyes when they hear the word fiduciary and say that the word doesn’t mean anything to them, but that they hear it everywhere.”

Overuse tends to devalue the term, and this may have been the case with “fiduciary.” “It peaked because everybody was discussing the issues of plan fiduciaries and it became commoditized like fees,” says Jairo Gomez, the Director of Retirement Plan Services at Allworth Financial, formally Hanson McClain Advisors, a California-based financial advising firm.

As with all overworked terms, the public airwaves eventually decide enough is enough and quit using the term. This absence can be quite noticeable to some. “I feel like it has peaked because the mainstream media rarely talks about it,” says Hooker, who adds,
“consumers get lost in the jargon if it doesn’t directly impact them so interest has gone away.”

But the media alone does not explain it. Certainly,
the industry – or, rather, a specific segment of the industry – had a vested interest to fight “fiduciary.” “The big money banks, brokers, mutual funds are not in favor,” says David S. Thomas Jr., CEO at Equitas Capital Advisors, LLC in New Orleans, Louisiana. “It is very difficult to retrain a salesman to stop pushing a product, and to start working in the best interest of the investor.”

Marc Smith, Managing Partner at Marc Smith Investments in Dillsburg, Pennsylvania, says, “If it has peaked, I would argue it’s because the large firms have made a push to convince the public it doesn’t matter.
Non-fiduciary advisors make a lot of money on commissions from placing clients in high-fee products. They have every interest in making people believe the fiduciary standard isn’t that important.”

It’s not necessarily due to industry malevolence, though. It could simply be that other topics have taken the forefront. “The focus (or interest) on fiduciary issues has seemingly diminished, probably as a result of recordkeepers’ and consultants’ efforts to market and/or highlight other concepts such as promoting greater savings (for example, by implementing automatic enrollment and/or automatic escalation),” says John C. Hughes, an ERISA/benefits attorney with Hawley Troxell in Boise, Idaho, says.

And this changing of the topical guard may be more important. It may not be that “fiduciary” has peaked. It may be that it has now become mainstream, second-nature in fact. “I don’t feel that it has peaked,” says Chris Shankle, Senior Vice President at Argent Retirement Plan Advisors in Shreveport, Louisiana. “It’s still a valid issue although for differing reasons depending on perspective (advisor, plan sponsor, regulator).”

Hughes, considers even asking why “fiduciary” may have peaked to be “a very interesting question.” He points out “the importance of recognizing one’s fiduciary duties and fulfilling them has not diminished. As such, the interest in fiduciary concepts having peaked is curious and dangerous. There have been no changes to those duties or the associated consequences. If anything, it is more important than ever to recognize and attempt to fulfil fiduciary duties given the increased amounts of money at issue, increased government enforcement, and the increase in lawsuits brought against fiduciaries by plan participants.”

Not even the SEC’s Reg BI, try as it might, can really take the luster from “fiduciary.” “I don’t agree at all with the term Fiduciary taking a back seat to the term Best Interest,” says Derek S. Taddei, Client Services – 401k Plan Marketplace at Stellar Capital Management in Phoenix, Arizona. “Regulation BI is brand new, and has yet to be sorted out. Brokerage firms may tout BI as the latest and greatest, but at present it is but a better version of the suitability standard.”

It is this continued affiliation with the suitability standard – even if it a “better version” of it – that may prove Reg BI’s undoing. And this may mean “fiduciary” isn’t going downhill for a while. “I don’t believe we’ve hit peak interest in fiduciary duty,” says Smith. “I think this is the most critical thing consumers should know before hiring an advisor. A fiduciary standard means I legally have to act in a client’s best interest. That’s very important when it comes to over-priced or high-commission financial products. Regulation Best Interest simply means the advisor has to put you in ‘suitable’ investments. That is a very vague and broad term. All manner of high-fee products could be deemed ‘suitable.’”

As Thomas says, “Fiduciary is not dead, just had a bucket of political cold water poured on it.”



Though perhaps verging on the cliché, “fiduciary” remains ascendant where it counts. “Certainly, for employers, it seems that they have become callused to the issue from its usage in sales pitches,” says Shankle. “Its relevance, however, is still quite high in the industry and is definitely still on the minds of regulators. I believe the DOL will still propose a rule, although different and possibly more focused than previously. Of course, too, there are the state proposals that are popping up. If we are to have multiple distinct rules proposed by states, we may have a peak in interest to come.”

So, yes, “fiduciary” still matters. It may not appear in superficial headlines at the rate it has in the past, but it is solidly ensconced in the hearts of those that matter most.

Christopher Carosa is a keynote speaker, journalist, and the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed Jun 12, 2019 1:47 pm

Reg BI limits brokers' use of title 'adviser' or 'advisor'
If brokers are not dually registered as advisers but use the term, they could run into trouble under new rule

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Jun 10, 2019 @ 4:39 pm
By Mark Schoeff Jr.

Brokers who are only brokers will have to be less cavalier in describing themselves as financial advisers, thanks to an advice reform package approved last week by the Securities and Exchange Commission.

Under Regulation Best Interest (Reg BI), brokers who are not dually registered as investment advisers cannot use the term "adviser" or "advisor" in their title. In the original proposal, restricting title use was in a separate rule.

The prohibition is now part of the disclosure obligation of Reg BI, which requires brokers to reveal to customers all material facts relating to the scope and terms of the relationship, including the capacity in which they're acting: as a broker or an adviser.

"We believe that in most cases, broker-dealers and their financial professionals cannot comply with the capacity disclosure requirement by disclosing that they are a broker-dealer while calling themselves an "adviser" or "advisor," Reg BI states on page 156. The title reform discussion runs from page 149 through 163.

Brokers increasingly are marketing themselves as financial advisers who can help customers with a range of wealth management needs beyond securities transactions. But they have avoided registering as investment advisers unless they put their clients into advisory accounts.

Reg BI states that the Financial Industry Regulatory Authority Inc. will review its rules for broker marketing communications in light of the rule.

Reg BI could force a major mindset change by brokers and registered representatives, according to Lawrence Stadulis, partner at Stradley Ronon Stevens & Young.

"Folks who are only authorized to sell securities as a broker can't use the term adviser because they would violate [Reg BI],"
Mr. Stadulis said.

But James Allen, head of capital markets policy Americas for the CFA Institute, said Reg BI allows brokers to wiggle out of the title strictures and claim they are advisers. The organization filed a comment letter last year advocating for tougher title reform.

"We're certainly disappointed," Mr. Allen said.

The rule "once again puts significant onus on enforcement and interpretation," he said.
"There seems to be a rebuttable presumption [that a broker is not an adviser]. We wanted it to be clear: You're either an investment adviser registered as an investment adviser or you're a broker and call yourself a broker."

Reg BI allows brokers who are dually registered as advisers to continue to use the adviser title.

"We believe it would be consistent for dual-registrants and dually registered financial professionals to use these terms as they would be accurately describing their registration status as an investment adviser," Reg BI states in a footnote on page 158.

A registered representative of a dually registered broker-dealer who is not also "a supervised person of an investment adviser" would be prohibited from using the title "adviser."

Of the 630,132 registered representatives in 2017, 286,799 were dually registered,
according to Finra.

Under Reg BI, brokers and advisers would continue to be regulated separately. Reg BI requires brokers not to put their interests ahead of their customers' interests. Investment advisers would continue to adhere to a fiduciary duty in client relationships. ... or-advisor
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Jun 10, 2019 1:15 pm

S.E.C. Tells Brokers to Work for You, but Don’t Skip the Fine Print
The Securities and Exchange commission said new rules would help ensure investors get advice they can count on. Advocates are skeptical.
Jonathan Ernst/Reuters ... -ios-share

The Securities and Exchange commission said new rules would help ensure investors get advice they can count on. Advocates are skeptical.CreditCreditJonathan Ernst/Reuters
By Tara Siegel Bernard
June 6, 2019

When you go to the doctor, there’s an expectation that she will act in your best interest. You don’t expect to be prescribed costly pills because the office is getting a commission from the drug company, when a healthier diet will do the trick.

The next time you get a financial checkup or make an investment, there will be new rules about what you can expect from your investment professional. But the rules shouldn’t necessarily give investors the comfort of a doctor-patient relationship.

The changes made by the Securities and Exchange Commission on Wednesday are voluminous — one rule change alone takes up 771 pages — but the agency said they would help ensure investors get advice they can count on.

Not everyone is convinced. Consumer advocates say the changes have weakened the standards governing one class of financial professionals while giving an unwarranted veneer of trustworthiness to another.

Here’s what investors need to know.

What’s new?

The most notable changes involve the rules for financial brokers and investment advisers.

Brokers — technically known as registered representatives — are licensed to sell mutual funds, stocks, bonds and other financial products to retail investors. Investment advisers are paid to provide financial guidance.

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Under the old rules, brokers were generally required to recommend investments that were “suitable” based on a customer’s characteristics, like their age, goals and tolerance for risk. Investment advisers have been held to a higher standard: fiduciary duty, which means always putting their customers first, in part by eliminating conflicts of interest or at least trying to mitigate them.

The new rules say that brokers cannot put their own interests ahead of their customers’ — an arguably higher standard than suitability, which experts say still falls short of saying customers come first. They also offer a new interpretation of the fiduciary duty standard: Investment advisers merely have to disclose conflicts of interest, not avoid them.

That disclosure provision is important: Advocates believe financial professionals will be able to rely on disclosure — potentially buried deep in paperwork — to profit at clients’ expense.
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One common example: A brokerage firm may receive money from a mutual fund provider through a practice known as revenue sharing. A broker could favor those funds over a lower-cost alternative when making a recommendation. This type of activity would be considered to be in your “best interest,” advocates say, as long as it’s disclosed.

“Regardless of whether you work with a broker dealer or an investment adviser, they are not going to be required to recommend the investments that are in your best interest,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

The other loophole

Sometimes brokers look like and act like advisers — as when they help people plan for retirement or save for college.

The new regulations have widened a loophole for brokers when they offer advice on meeting those goals. If the advice was “solely incidental” to their service as a broker and they didn’t receive special compensation for the advice, they don’t have to act as fiduciaries — something that will now be easier to do. It also means they don’t have a duty to monitor your account, so you might not get a heads-up if things go off track.

There are exceptions: Brokers with authority to move your money around without your permission are considered advisers, under the law, and the same goes for brokers who collect a regular fee to manage your money.

This puts the onus on customers to understand who they’re working with and how those financial professionals are compensated.

Advisers remain the best bet

The safest course is picking an independent, fee-only adviser who makes an explicit promise to act as a fiduciary.

Fee-only pros are not compensated when they sell you something. Instead, they will receive a flat fee, an hourly charge, or payment calculated as a percentage of the assets they manage for you. It’s clean and transparent.

Another option: certified financial planners, a professional designation with rigorous curriculum and experience requirements. They pledge to act as fiduciaries when providing financial advice and can lose their designation if their self-governing board discovers they have not. ... -ios-share

You can find these types of professionals through the following associations: The Garrett Planning Network, the National Association of Personal Financial Advisors and XY Planning Network. Roboadvisers — which provide automated advice, sometimes with human help — are another alternative.

If the brokerage firm that your adviser works for will not permit them to use their certified financial planner credentials, that is a huge red flag.

The pledge

Then there’s the ultimate test: Ask your advisers to sign a fiduciary pledge, which states that you expect them to put your interests first all of the time, with all of your money, in all of your accounts.

Any disputes you have — with brokers and advisers alike — are likely to be settled in arbitration anyway. But having a signed pledge in your back pocket, experts have said, can only bolster your case. ... -ios-share
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Jun 07, 2019 7:33 am

Advocate Comments: I will outline in red those portions of this article which I believe allow brokers to get away with a “Bait and Switch” and to more easily deceive investors into a false sense of trust and vulnerability.

Press Release
SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals
Washington D.C., June 5, 2019 —

The Securities and Exchange Commission today voted to adopt a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. Specifically, these actions include new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940.

Individually and collectively, these actions are designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.

“The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades,” said SEC Chairman Jay Clayton. “Our staff, working collaboratively across all of our Divisions and many of our Offices, has leveraged its decades of experience and expertise in considering these issues. I believe that the exceptional work of the SEC staff, including their careful evaluation of the feedback we received, will benefit retail investors and our markets for years to come. This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”

Under Regulation Best Interest, broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.

The Form CRS Relationship Summary will require registered investment advisers and broker-dealers to provide retail investors with simple, easy-to-understand information about the nature of their relationship with their financial professional. While facilitating layered disclosure, the format of the relationship summary allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. Form CRS will also include a link to a dedicated page on the Commission’s investor education website,, which offers educational information about broker-dealers and investment advisers, and other materials.

The Commission also issued an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients under the Advisers Act. The interpretation reflects how the Commission and its staff have applied and enforced the law in this area, and inspected for compliance, for decades. By highlighting principles relevant to the fiduciary duty, investment advisers and their clients will have greater clarity about advisers’ legal obligations.

Finally, the Commission issued an interpretation of the “solely incidental” prong of the broker-dealer exclusion under the Advisers Act, which is intended to more clearly delineate when a broker-dealer’s performance of advisory activities causes it to become an investment adviser within the meaning of the Advisers Act. This interpretation confirms and clarifies the Commission’s position, and illustrates the application in practice in connection with exercising investment discretion over customer accounts and account monitoring.

Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance. Our interpretations under the Advisers Act will become effective upon publication in the Federal Register.

The Commission recognizes that these new rules will require various market participants to make changes to their operations, including to mandatory disclosures, marketing materials and compliance systems. In order to assist firms with planning for compliance with these new rules, the Commission is establishing an inter-Divisional Standards of Conduct Implementation Committee. We encourage firms to actively engage with this committee as questions arise in planning for implementation. You may send your questions by email to:

* * *


SEC Open Meeting
June 5, 2019

The Commission adopted a package of new rules and amendments and interpretations to enhance the quality of retail investors’ relationships with broker-dealers and investment advisers. The rulemaking package is designed to enhance investor protections while preserving retail investor access and choice in: (1) the type of professional with whom they work, (2) the services they receive, and (3) how they pay for these services.

The new rules will enhance the standard of conduct that broker-dealers owe to their customers and align the standard of conduct with retail customers’ reasonable expectations. The rules will also provide additional transparency and clarity for retail investors through enhanced disclosures designed to help them understand who they are dealing with, and why that matters. The interpretations reaffirm, and in some cases clarify, the standard of conduct that investment advisers owe to their clients and clarify the scope of the services a broker-dealer can provide consistent with the statutory definition of investment adviser.

With the adoption of this package, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.

Proposal’s Highlights

Regulation Best Interest

Regulation Best Interest imposes a new standard of conduct specifically for broker-dealers that substantially enhances the broker-dealer standard of conduct beyond existing suitability obligations. The standard of conduct draws from key fiduciary principles and cannot be satisfied through disclosure alone. It provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation.

When making a recommendation of a securities transaction or an investment strategy involving securities, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests. Regulation Best Interest, in an enhancement from the proposal, applies to account recommendations, including recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution. It also applies to implicit “recommendations to hold” that result from agreed-upon account monitoring.

Regulation Best Interest includes the following components:

Disclosure Obligation: Broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.

Care Obligation: A broker-dealer must exercise reasonable diligence, care and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation. The broker-dealer must then consider these factors in light of the retail customer’s investment profile and make a recommendation is in the retail customer’s best interest. The final regulation, which is an enhancement from the proposal, explicitly requires the broker-dealer to consider the costs of the recommendation.

Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. This obligation, which is an enhancement from the proposal, specifically requires policies and procedures to:
Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest or the interests of the firm ahead of the retail customer’s interest;

Prevent material limitations on offerings, such as a limited product menu or offering only proprietary products, from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer’s interest; and

Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.

Compliance Obligation: In an enhancement from the proposal, broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.
Form CRS Relationship Summary

Investment advisers and broker-dealers will be required to deliver a relationship summary to retail investors at the beginning of their relationship. Firms will summarize information about services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history. The relationship summary will have a standardized question-and-answer format to promote comparison by retail investors in a way that is distinct from existing disclosures. The relationship summary will permit the use of layered disclosure so that investors can more easily access additional information from the firm about these topics. It also will highlight the Commission’s investor education website,, which offers the investing public educational information, including a series of educational videos designed to provide ordinary investors with some basic information about broker-dealers and investment advisers.

Investment Adviser Interpretation

An investment adviser owes a fiduciary duty to its clients under the Advisers Act—a duty that is established by and enforceable through the Advisers Act. This duty is principles-based and applies to the entire relationship between an investment adviser and its client. The final interpretation reaffirms, and in some cases clarifies, certain aspects of the federal fiduciary duty that an investment adviser owes to its clients.

Solely Incidental Interpretation

The broker-dealer exclusion under the Advisers Act excludes from the definition of investment adviser—and thus from the application of the Advisers Act—a broker or dealer whose performance of advisory services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for those services.
The interpretation confirms and clarifies the Commission’s interpretation of the “solely incidental” prong of the broker-dealer exclusion of the Advisers Act. Specifically, the final interpretation states that a broker-dealer’s advice as to the value and characteristics of securities or as to the advisability of transacting in securities falls within the “solely incidental” prong of this exclusion if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.

What’s Next?

The rules, forms, and interpretations will be published on the Commission’s website and in the Federal Register. The rules and forms will be effective 60 days from publication in the Federal Register and the interpretations will be effective upon publication in the Federal Register.

By June 30, 2020, registered broker-dealers must begin complying with Regulation Best Interest and broker-dealers and investment advisers registered with the Commission will be required to prepare, deliver to retail investors, and file a relationship summary.

In order to assist firms with planning for compliance with these new rules, the Commission is establishing an inter-Divisional Standards of Conduct Implementation Committee, comprised of representatives from our Division of Investment Management, Division of Trading and Markets, Division of Economic and Risk Analysis, Office of Compliance Inspections and Examinations, and Office of the General Counsel. We encourage firms to actively engage with this committee as questions arise in planning for implementation. You may send your questions by email to
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed May 15, 2019 6:29 pm

Bloomberg Opinion
Trump Could Cost Future Retirees Billions
Abandoning the fiduciary rule was a mistake.
By Ethan Schwartz
May 6, 2019

Screen Shot 2019-05-15 at 7.25.56 PM.png

Last year, the Trump administration abandoned a regulation designed to protect U.S. savers from conflicted investment advice. Known as the fiduciary rule, it would have required more brokers and insurance agents to disclose when they’re getting paid to steer people into certain investments. It also would have banned the sale of certain retirement products when they aren’t in savers’ “best interest.”

So did the rule’s demise benefit Americans by empowering them to “make their own financial decisions,” as Trump indicated he wanted to do? The evidence suggests not. Sales of potentially questionable investment products have soared, and retirees stand to end up billions of dollars poorer.

One prime example: fixed-indexed annuities. Often aggressively marketed and loaded with fine print, they promise participation in the stock market’s upside with no risk of loss. Although some can be useful for tax and insurance planning, when mis-sold they can amount to an unduly complex version of a strategy that investors can replicate at much lower cost.
Among their attractions for insurance agents: high commissions and bonuses that have included beach vacations and cruises.

Insurance agents’ behavior suggests some of them doubt that these products always serve clients’ best interest. Sales of fixed-indexed annuities plunged after the Labor Department issued its final version of the fiduciary rule in April 2016. Predictably, sales recovered quickly after June 2018, when the Trump administration allowed a court to vacate the rule with no pushback from the Labor or Justice departments.
In the last three months of 2018, sales amounted to $19.5 billion, according to the Life Insurance Marketing and Research Association. That’s up 40 percent from a year earlier.

A Boom in Questionable Investments
Sales of fixed-indexed annuities rebounded after protections were relaxed.

Source: Life Insurance Marketing and Research Association
In New York state, which has unilaterally adopted aspects of the fiduciary rule, far fewer insurers sell such products.

How much do savers stand to lose? Consider one product that a major insurance company marketed to me: a 10-year annuity linked to the S&P 500 Index.
Based on this annuity’s formula and the price at which it was offered, a client would have foregone on average an estimated $54,000 in profit per $100,000 invested over any 10-year period going back to 1989.
That’s compared with a simple combination of U.S. Treasury bills and S&P 500 index funds that offers the same downside protection as the annuity with less credit risk and more liquidity.

The marketing materials an agent sent me seemed to play on fear, showing a potentially faulty comparison of the annuity’s returns to the loss a pure stock position would have suffered during the 2008-09 crash. And the materials did not highlight crucial information such as hefty withdrawal fees and the insurance company’s right to reduce payouts.

Such products are just the tip of the iceberg.
Every year insurers come out with an array of new annuities employing “black box” strategies that are all but impossible for outsiders to understand.
One could be forgiven for suspecting that some such strategies have been tweaked to make it difficult for a lay person to accurately assess their return potential.

No current efforts to improve standards — including one by the National Association of Insurance Commissioners –- come close to the protections that the fiduciary rule would have provided. A strong form of the rule should be revived and applied to all investment accounts, not just retirement accounts. To be clear, there are upstanding insurers and agents who sell indexed annuities only when appropriate.
Proper regulation wouldn’t crimp those sales, but it would prevent over-prescription of such products to people whom they can harm. ... s-billions
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sun Jan 27, 2019 8:17 pm ... f-coverage

Screen Shot 2019-01-27 at 8.12.02 PM.png

Nevada fiduciary proposal packs punch with broad scope of coverage

Fiduciary advocates give it high marks for capturing the full range of conduct that should be subject to a fiduciary standard

Jan 23, 2019 @ 5:09 pm
By Mark Schoeff Jr.

A proposed regulation to raise advice standards in Nevada for stock brokers and financial advisers is receiving high marks from fiduciary advocates.

Last week, the Nevada Securities Division released the eight-page regulation proposal to implement a law enacted in 2017 that requires brokers to meet a fiduciary duty when working with their clients.
The Nevada rule is expansive in defining financial advice as well as the circumstances in which brokers would commit fiduciary breaches.

The state is moving ahead with the measure while the Securities and Exchange Commission continues to work on its advice reform proposal — a three-part package that would continue to regulate investment advisers as fiduciaries while requiring brokers to act in the best interests of their clients.

A comment period on the Nevada proposal will end March 1. After that, the state regulatory could modify the rule. It's unclear when a final regulation will be released.

"The Nevada fiduciary proposal is stronger and more elegant than the SEC proposal," said Benjamin Edwards, an associate law professor at the University of Nevada-Las Vegas. "It does in eight pages what the SEC needed a thousand pages to do less effectively."

The breadth of the Nevada proposal, which also touches on investment advisers, jumped out to Skip Schweiss, managing director of adviser advocacy at TD Ameritrade Institutional.

"This covers the landscape," Mr. Schweiss said. "There's no getting around being a fiduciary if you're providing advice as a broker or an adviser."

Under the Nevada proposal, brokers must provide an ongoing fiduciary duty to clients if they manage the client's assets or create periodic financial plans, among other factors. Outside of those circumstances, the fiduciary requirement can be transaction-by-transaction.

The Nevada proposal assumes a broker who is dually registered as an adviser acts as an adviser for clients throughout the relationship and must always meet the fiduciary standard.
The fiduciary requirement would apply to brokers across several kinds of job titles and to those who "hold themselves out" as advisers.

"One of the strengths of the regulation is the broad scope of its coverage," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does a good job of capturing the whole range of broker-dealer conduct that should be subject to a fiduciary standard."

But the expansiveness of the Nevada proposal is a drawback for Lawrence Stadulis, a partner at Stradley Ronon Stevens & Young.

"The regulations were certainly more extensive than we had anticipated," Mr. Stadulis said. "The most surprising aspect was the number of activities that are deemed a breach of fiduciary duty. There are a lot of kinks in the proposed regulation that need to be worked out."

Ms. Roper also said some improvements are needed. A benefit of the SEC proposal is that it would require mitigation of conflicts of interest, although the SEC hasn't outlined how they should be mitigated. The Nevada proposal doesn't touch on mitigation.

"We'd like to see them do more to ensure that conflicts of interest do not inappropriately influence recommendations," she said.

Brian Graff, chief executive of the American Retirement Association, is concerned that the Nevada proposal does not provide an exemption for advice to retirement plans and plan assets governed by federal retirement law. He argues that retirement plan advisers in the state should only have to answer to the federal government.

"Frankly, [the Nevada regulation] is likely to go to litigation if advice with respect to covered plans is not carved out," Mr. Graff said.

Critics of the proposal also are likely to argue in comment letters that the SEC rule should trump state investment advice regulations.

But Mr. Edwards said Nevada is on solid ground.

"It's well within state authority to regulate conduct and protect its citizens from financial fraud," he said.

Other states have introduced investment advice legislation — and New Jersey is considering its own fiduciary regulation.

"We're not done here," Mr. Graff said in reference to state activity.
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Dec 29, 2018 1:17 am

Screen Shot 2018-12-29 at 1.15.01 AM.png ... the-perils

Will the S.E.C. aid and abet fraud in 2019? A fictionalized grilling of Jay Clayton under truth ether reveals the perils

Will the S.E.C. aid and abet fraud in 2019? A fictionalized grilling of Jay Clayton under truth ether reveals the perils

With brokers the special interest, the simple principle of putting client interests first, gets mangled in the wording. But two can play that game so Ron Rhoades fights back with his pen

December 27, 2018 — 1:40 PM MST by Guest Columnist Ron A. Rhoades

1 Comment
While Ron Rhoades, RIABiz’s “One-Man Think Tank” was largely silent during 2018 in terms of his writings in industry publications, he has not-so-quietly been advocating at the S.E.C. and to other government agencies, through seven comment letters spanning a mere 318 pages and in several in-person visits to agency heads and staffers.

Before taking a self-imposed vow of silence, Ron Rhoades sounds off on the RIA industry and tells what's it's like to hit a professional wall. Ron advises that 2019 may well be a watershed year, in terms of defining standards of conduct for personal financial advisors – at the U.S. Securities and Exchange Commission, at the U.S. Department of Labor an at several state securities regulators. It will also be a defining year in state regulation of market conduct involving sales of life insurance and annuities and Certified Financial Planners.

In this article, Ron takes the S.E.C. to task for its down-the rabbit hole way of reverting to suitability rules and using mirrors to suggest otherwise. Because no word goes untwisted by the influence of lobbyist cocktails, our Think Thank is going all Socrates here at full-moon Christmas. In other words, Ron Rhoades pulled out his fiction quill to imagine for us an exchange between the chair of a congressional committee and current chair of the Securities and Exchange Commission, Jay Clayton. See: A conversation between a wirehouse advisor and a senior citizen who seeks trust The hypothetical dialogue "would result from proper Congressional oversight – if procedural rules permitted extended questioning, and if those testifying before Congress would not seek to answer evasively and ambiguously," Rhoades tells as preamble to this editor.

Here goes the back and forth related to the S.E.C.’s Regulation BI's attempts to redefine the English language, hence misleading individual investors for all time to place trust in their brokers, even though the actual language of the rule is clear: Only an arms-length (seller-buyer) relationship exists.

Committee Chair: “Welcome, SEC Chair Clayton.”

Mr. Clayton: “Thank you, Madam Chairman.”

Committee Chair: “We are here today to discuss the U.S. Securities and Exchange Commission’s proposed Regulation Best Interest, also known as Reg BI. Mr. Clayton, are you ready for questions.”

Mr. Clayton: “More than ready, Madam Chairman.”

What the &!*#?
Committee Chair: “What the &!*# are you doing?”

Mr. Clayton: “Excuse me?”

Committee Chair: “I wish you would not only excuse yourself, but also recuse yourself, for all time.”

Mr. Clayton: “I don’t understand.”

Committee Chair: “That is readily apparent from the language of Reg BI. Why don’t we take it one step at a time.”

Mr. Clayton: “O.K.”

Committee Chair: “Under your direction, the SEC has proposed ‘Regulation Best Interest,’ and since then, the SEC has received dozens of comment letters and is looking to finalize this regulation, is it not.”

Mr. Clayton: “Yes.”

Committee Chair: “And under this proposal, as you testified before another Congressional committee on December 11, 2018, and I quote: ‘Specifically, proposed Regulation Best Interest would enhance broker-dealer standards of conduct by establishing an overarching obligation requiring broker-dealers to act in the best interests of the retail customer when making recommendations of any securities transaction or investment strategy involving securities. Simply put, under proposed Regulation Best Interest, a broker-dealer cannot put her or his interests ahead of the retail customer’s interests. The proposal incorporates that key principle and goes beyond and enhances existing suitability obligations under the federal securities laws. To meet this requirement, the broker-dealer would have to satisfy disclosure, care and conflict of interest obligations.’”

Mr. Clayton: “That was my testimony, Madam Chair.”

Committee Chair: “Mr. Clayton, are you aware that in a December 2, 2015 hearing before the Subcommittee on Health, Employment, Labor, and Pensions, of the U.S. House Education and Workforce Committee, Rep. Suzanne Bonomaci, questioning securities and insurance industry executives, inquired: ‘Just to be clear, does everyone agree that a ‘best interests’ standard means a ‘best interests fiduciary standard?’ And, are you aware that each of the industry executives then answered in the affirmative?”

Mr. Clayton: “I was not aware of that, Madam Chair.”

Committee Chair: “In your own testimony, you have stated that brokers, under your Proposed Reg BI, will be ‘required to act in the best interests of the retail customer.’ Does this not mean that brokers will possess a fiduciary duty of loyalty to their customers?”

No obligation
Mr. Clayton: “No, it does not. No fiduciary obligation is imposed.”

Committee Chair: “Despite the fact that under Section 913 of The Dodd Frank Act of 2010, the Congress expressly provided the SEC with the authority to impose a fiduciary standard upon brokers who provide personalized investment advice that is no less stringent than the standard for investment advisers?”

Mr. Clayton: “Correct, Madam Chair. The Commission has decided to not go down that path, at this time.”

Committee Chair: “But, you do require brokers to place their customers interests ahead of their own, under Reg BI, is that not true?”

Mr. Clayton: “Yes.”

Committee Chair: “Is it? Really? Let me quote from the proposed Reg BI itself, and specifically let me quote the ‘safe harbor’ language you provide that permits a broker to satisfy this ‘best interest’ duty:

The best interest obligation in paragraph (a)(1) shall be satisfied if:

(i) Disclosure Obligation. The broker, dealer, or natural person who is an associated person of a broker or dealer, prior to or at the time of such recommendation, reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer, including all material conflicts of interest that are associated with the recommendation.

(ii) Care Obligation. The broker, dealer, or natural person who is an associated person of a broker or dealer, in making the recommendation exercises reasonable diligence, care, skill, and prudence to:

(A) Understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;
(B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks and rewards associated with the recommendation; and
(C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile.

(iii) Conflict of Interest Obligations.
(A) The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations.
(B) The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendations.

Mr. Clayton: “That is Reg BI’s safe harbor, Madam Chair.”

Committee Chair:
“So, when a conflict of interest is present, let’s review the broker’s obligations under the safe harbor. First, there must be disclosure of the conflict of interest.”

Mr. Clayton: “Yes.”

Committee Chair:
“But there does not exist, in this part of the rule, any obligation to avoid a conflict of interest, nor is there a requirement – as exists under fiduciary law – to provide affirmative disclosure of a conflict of interest in a manner that ensures client understanding of the conflict of interest, and obtaining the informed consent of the client?”

‘Best interest’ standard is not ...
Mr. Clayton:
“That is correct, Madam Chair. The broker’s ‘best interest’ standard is not a fiduciary standard.”

Committee Chair:
“Second, the broker must exercise reasonable diligence, care, skill, and prudence in order to possess a ‘reasonable basis to believe that the recommendation is in the best interest of a particular retail customer.’ Is ‘reasonable basis’ defined by the rule, and is the term ‘best interest’ defined by the rule?

Mr. Clayton: “No, those terms are not defined in the rule itself.”

Committee Chair: “And is it not true that this second set of obligations – what might be called the ‘care obligation’ - is based upon existing reasonable-basis, customer-specific, and quantitative suitability obligations.”

Mr. Clayton:
“Correct, this care obligation of the broker is closely analogous to the suitability standard.”

Committee Chair: “So, in applying this new standard, how would it be applied differently than the suitability obligation?”

Mr. Clayton: “The broker must act in the ‘best interests’ of the customer.”

Committee Chair: “Who will be the primary enforcer of this new ‘best interest” standard upon broker-dealers?”

Mr. Clayton: “The broker-dealer firms’ self-regulatory organization, the Financial Industry Regulatory Authority, or FINRA, by means of examination and enforcement actions. The rule will also be enforced in arbitration hearings when customers bring complaints.”

Committee Chair: “And those arbitration hearings are governed by FINRA rules, are they not?”

Mr. Clayton: “Yes.”

Committee Chair: “Yet, as FINRA stated in its comment letter to the SEC on Reg BI, FINRA's suitability rule already implicitly requires a broker-dealer's recommendations to be consistent with customers' best interests.”

Mr. Clayton: “FINRA has taken the position since May of 2012 that, and I quote from FINRA’s release, ‘The suitability requirement that a broker make only those recommendations that are consistent with the customer's best interests prohibits a broker from placing his or her interests ahead of the customer's interests.’”

One example, please!
Committee Chair: “I see. So, in essence, the term has already been defined by FINRA, and FINRA already has a rule in place that imposes this ‘best interests’ obligation.
So, Mr. Clayton, here’s my question. What is different? Give me examples of how brokers’ conduct will be changed under this duty of care, from what brokers are obligated to do currently?”

Mr. Clayton: “Uh … uh …”

Committee Chair:
“So we have here a rule, that will be predominately enforced by FINRA, the broker-dealer’s own organization, that does not actually impose any substantial new obligations under brokers.”

Mr. Clayton: “But, Madam Chair, there does exist a duty to mitigate conflicts of interests under Reg BI.”

Committee Chair: “Yes, that seems true. Let’s return to the safe harbor. Third, the brokerage firm must adopt certain policies and procedures ‘designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives.’ Is the extent of ‘mitigation’ defined by the rule?”

Mr. Clayton: “No, it is not. But, Madam Chair, in our issuing release ….”

Committee Chair: “Let’s stop right there, Mr. Clayton. I knew you were going to point to the flowery language contained in your release of proposed Reg BI, SEC Release No. 34-83062.
That flowery language, found throughout the release, seems to make the rule very appealing to individual investors and consumer advocates. That language appears to make the rule sound like it imposes very substantial obligations upon brokers. But, in point of fact, the language in the release is not part of the rule itself. So, when Reg BI, if it is finalized, is adopted, FINRA arbitrators will only be required to look to the language of the rule itself, and how the term ‘best interest’ has been interpreted by the broker-dealer firms’ own organization, FINRA. Is that not correct.”

Mr. Clayton: “That is substantively correct, Madam Chair. But, again, for the first time there is a requirement, under Reg BI, that brokers mitigate their conflicts of interest.”

Committee Chair: “Not true, Mr. Clayton. There is only a requirement that brokerage firms adopt policies and procedures to this effect. And mitigation might exist, for example, by mere disclosure of the conflict of interest.”

Mr. Clayton: “That was not my intent. The intent of Reg BI is to mitigate the most substantial conflicts of interest that currently exist in brokerage firms.”

Committee Chair:
“But, as stated by the Financial Services Institute in its comment letter to the SEC regarding Reg BI, nothing in the rule would ‘per se prohibit a broker from transactions involving conflicts of interest, including for example: receiving commissions or transaction-based compensation, recommending proprietary products, principal transactions, or complex products.’ In fact, the rule imposes no substantive restriction on the most insidious conflicts of interest present in the brokerage industry today, is that not correct?”

Mr. Clayton: “Madam Chair, I … I … disclosures of conflict of interests must exist.”

Committee Chair: “I see. Mr. Clayton, is the form of disclosure of conflict of interest set forth under the rule?”

Mr. Clayton: “No, it is not.”

Committee Chair: “Let’s examine how a brokerage firm and its brokers, other than the generic disclosures contained in your proposed Form CRS, would be required to satisfy its disclosure obligations to its customers. Suppose a brokerage firm sold a mutual fund to a customer for which the brokerage firm receives compensation in the form of commissions, 12b-1 fees, payment for shelf space, soft dollars, and sponsorship of educational events such as a brokerage firm’s own educational conference sessions as well as sponsorship of seminars that market to new customers. Is the firm required under this proposed Reg BI to disclose to the customer the amount of compensation it receives from the mutual fund company, in total?”

Mr. Clayton: “No.”

Committee Chair: “Is the brokerage firm required under Reg BI to disclose to the customer each type, or form, of compensation it receives, from the mutual fund company?”

Mr. Clayton: “No, Madam Chair.”

Committee Chair:
“Is the brokerage firm required to disclose that it gets paid more to sell some products than other products?”

Mr. Clayton:
“No, Madam Chair.”

Committee Chair: “Could the brokerage firm, in essence, satisfy this obligation of disclosure of material conflicts of interest, found under your proposed BI, by just using the wide-criticized disclosure that the Commission proposed back in 2005 in connection with the ill-fated ‘Merrill Lynch rule’ … a form of ‘casual disclosure’ in which a broker might just state: ‘Our interests may not be aligned with yours’? And, as FSI suggests, ‘it is enough to disclose that different products are available with different costs,’ while not expressly disclosing all of the specific costs and specific types or amounts of compensation received by the brokerage firm and its brokers?”

Mr. Clayton: “We have not defined the extent of a broker’s specific disclosure obligations in Reg BI.”

Committee Chair: “Even if you did so, is it not true that disclosures possess limited effectiveness in protecting consumers, Mr. Clayton?”

Mr. Clayton: “Disclosures form the basis of federal securities regulation, Madam Chair.”

Committee Chair: “But not the basis of the Investment Advisers Act of 1940, and the fiduciary obligations imposed upon those who provide investment advice, Mr. Clayton. In fact, in situations where there is a vast disparity of knowledge and expertise in a complex environment, such as the capital markets today with its myriad of different investment strategies and often extremely complex securities, disclosures are not effective as a means of consumer protection. If disclosures were effective, in essence there would be no reason for the fiduciary standard of conduct to exist under the law, and no reason for the Investment Advisers Act of 1940, is that not true?”

Mr. Clayton: “I’m not certain I follow you, Madam Chair.”

Efficacy of
Committee Chair: “Come now, Mr. Clayton. You are the Chair of the SEC. Certainly you are aware of the huge amount of academic research concluding that disclosures are largely ineffective as a means of consumer protection when investment advice is being provided?”

Mr. Clayton: “But brokers are only providing incidental advice, and as such are exempt from the application of the Investment Advisors Act of 1940, Madam Chair.”

Committee Chair: “Is that so? The Advisers Act’s exclusion for broker-dealers only provides an exclusion for ‘solely incidental’ or ‘merely incidental’ advice, is that not correct?”

Mr. Clayton: “Yes, Madam Chair. And we have interpreted that to mean any advice that is ‘in connection with’ and ‘reasonably related to’ a brokerage transaction.

Committee Chair: “Mr. Clayton, words have meaning. The words ‘solely incidental’ appear to have been redefined out of existence, by the SEC’s interpretation. And now, in Reg BI, the Commission exacerbates this mistake. Regulation Best Interest as proposed repeatedly characterizes the broker-dealer model as a ‘model for advice.’ You suggest that preserving the broker-dealer model is all about ‘preserving investor choice across … advice models.’ And you further note in Reg BI that the broker-dealer model is ‘an option for retail customers seeking investment advice.’ In point of fact, did you not yourself recently state that brokers are in an ‘advice relationship’ with their customers.”

Mr. Clayton: “Madam Chair, you are quoting me out of context.”

Committee Chair: “Then let me quote your recent testimony, under oath, before this Congress, in which you stated,
‘Broker-dealers and investment advisers both provide investment advice to retail investors, but their relationships are structured differently and are subject to different regulatory regimes. However, it has long been recognized that many investors do not have a firm grasp of the important differences between broker-dealers and investment advisers ….’
Mr. Clayton, has not the SEC, over the past several decades, failed to draw a line between what is a seller-purchaser, arms-length relationship, such as exists between brokers and their customers, and what is a fiduciary-client, or investment adviser-client, relationship?”

Mr. Clayton: “We have drawn that line. If special compensation is received, such as ongoing asset-based compensation, by a broker, that broker must register under the Advisers Act and is subject to the Advisers Act’s fiduciary duties.”

12b-1 fees
Committee Chair: “Ah, the receipt of ongoing asset-based compensation is where you draw the line. So brokers cannot should not be receiving 12b-1 fees, such as those found in Class C shares, which are often 1% a year of the amount of the assets being managed, without being held to the Advisers Act and its fiduciary standard?”

Mr. Clayton: “That is not the position we have taken. 12b-1 fees are a form of commission.”

Committee Chair: “Mr. Clayton, what you are saying is that brokers can receive ongoing compensation, such as a 1% a year fee paid by a mutual fund the investor owns, for nearly any amount of investment advice they provide, without any real limit on the amount of the advice provided, and are still eligible for the broker-dealer exemption. I may be just an old country lawyer, but I know this – if it walks like an ugly duck and swims like a ugly duck and quacks like an ugly duck, that bird is and must be a duck. Even you, Mr. Clayton, the all-mighty Chair of the SEC, can’t turn that ugly duck into a white swan.”

Mr. Clayton: “If you say so, Madam Chair.”

Committee Chair: “Let’s get back to your over reliance on disclosure. Do you think consumers read, and understand, even basic disclosures of mutual fund costs and their impact upon the returns of the fund?”

Mr. Clayton: “That is the purpose of the disclosures.”

Committee Chair: “Then you must be aware of the two research studies undertaken by Professors James Choi, David Laibson, and Brigitte Madrian, ‘Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds.’ In these research studies the subjects – Wharton MBA and Harvard students – were each given $10,000 to allocate across four S&P 500 index funds and were to be rewarded for their portfolio's subsequent return, but such research demonstrated that the studies’ participants overwhelmingly failed to minimize fees.”

Mr. Clayton: “Those are just two studies, Madam Chair.”

Mythology 101
Committee Chair: “But, Mr. Clayton, there are so many more. In fact, the SEC’s emphasis on disclosure results from the myth that investors carefully peruse the details of disclosure documents that regulation delivers. However, under the scrutinizing lens of stark reality, this picture gives way to an image a vast majority of investors who are unable, due to behavioral biases and lack of knowledge of our complicated financial markets, to undertake sound investment decision-making. As stated by former SEC Commissioner Troy Parades, ‘investors are not perfectly rational … when faced with complicated tasks, people tend to ‘satisfice’ rather than ‘optimize,’ and might fail to search and process certain information.’ And, as Professor Ripken has written, ‘there is doubt that disclosure is the optimal regulatory strategy if most investors suffer from cognitive biases … While disclosure has its place in a well-functioning securities market, the direct, substantive regulation of conduct may be a more effective method of deterring fraudulent and unethical practices.’ And, as Professor Robert Prentice informs us, ‘instead of leading investors away from their behavioral biases, financial professionals may prey upon investors’ behavioral quirks … Having placed their trust in their brokers, investors may give them substantial leeway, opening the door to opportunistic behavior by brokers, who may steer investors toward poor or inappropriate investments.’”

Mr. Clayton: “We can all cite studies, Madam Chair.”

Committee Chair: “What is asked of you, Mr. Clayton, is that you not hand-pick excerpts from studies to justify your intended actions, but that you carefully consider all of the academic research that does exist in your rule-making efforts, to ensure that your proposed regulation is grounded not in hope, but in reality, and that its economic consequences – both large and small – have been appropriately considered.”

Mr. Clayton: “Of course, Madam Chair.”

Committee Chair:
“And what is also required it that you not seek to change the English language, as a means of deceiving the American consumer of investment advice. In the law the phrase ‘best interests’ has meant, for centuries, the fiduciary duty of loyalty. Mr. Clayton, as stated by our own U.S. Supreme Court, in SEC vs. Capital Gains, a case I am certain you are familiar with, ‘The court interprets Section 206 to establish a fiduciary duty which in addition to applying to misrepresentations and omission, also requires the investment advisor to act in the best interests of its clients.’

Mr. Clayton: “That is one definition of ‘best interests,’ Madam Chair.

Committee Chair:
“Well, I have no idea where you get your definition from, Mr. Clayton. Certainly not from a recognized dictionary. In fact, Black’s Law Dictionary, defines a fiduciary duty as ‘a duty to act with the highest degree of honesty and loyalty toward another person and in the best interest of the other person.’ The meaning of ‘best interests’ as indicative of the fiduciary relationship is universal in other common law countries. As but one example, and as explained in Pilmer v Duke Group, the fiduciary obligation is a pledge, or undertaking, by one party to act in the best interests of the other, and this is what makes fiduciary relationships distinct from other relationships. Mr. Clayton, you seek to destroy the fiduciary standard, by redefining the term ‘best interests’ to mean nothing more than something a bit higher than the low suitability standard.”

Mr. Clayton: “I do not, Madam Chair, have that intention.”

Cardoza's edict
Committee Chair: “But that is what will occur. Should you not, instead, heed the warnings of the great Justice Benjamin Cardoza, who so famously stated that ‘Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.’”

Mr. Clayton: “It is not my desire to erode the fiduciary standard.”

Committee Chair:
“But that is the path that you are on, sir, whether you realize it or not. You seek to upend centuries of established jurisprudence with one swipe of cloudy ink from your reckless, leaky pen. You seek to have ‘best interest’ to be used by brokers, when in fact they remain in arms-length relationships with their customers.”

Mr. Clayton: “Madam Chair, I must state, Reg BI does – even if only slightly – raise the standard of conduct for brokers, and no one will be harmed by the rule when it is finalized.”

Committee Chair:
“No one is harmed, Mr. Clayton? Not individual investors, who deal with brokers who represent themselves to their customers as acting in the ‘best interest’ of the customer, when in fact there exists no fiduciary duty of loyalty to the customer, and when in fact the interests of the broker-dealer firm, and the broker, can be and remain paramount to that of the customer?”

Mr. Clayton: “Madam Chair …”

Committee Chair: “And certainly, Mr. Clayton, an educated man such as yourself, a graduate of Cambridge with a Masters in Economics, would certainly be aware of the Nobel Prize-winning work of leading economist George Akerlof, who is best known for his article, ‘The Market for Lemons: Quality Uncertainty and the Market Mechanism.’ In this article, Akerlof so clearly demonstrates that in a market – such as that for financial and investment advice – in which a vast asymmetry of information exists, and where a consumer advice that purports to be in the consumer’s ‘best interests’ may not really be keeping the consumer’s best interest paramount or not, it is a natural consequence is that more ‘lemons’ appear in the market. This leads to a rush – not to the top for standards of conduct by providers of investment advice - but rather to the bottom. In other words, what you are really fostering is conduct from those in the gutter. In essence, you will be harming not just the consumers who purchase lemons, but also harming those honest ’40 Act investment advisers who are bound by law under a fiduciary duty of loyalty to their clients, but whose distinction in the marketplace would be obliterated by this proposed Regulation BI.”

Mr. Clayton: “I am familiar with Mr. Akerlof’s work, Madam Chair.”

Brazen misrepresentation
Committee Chair: “And will not this type of brazen misrepresentation – perhaps amounting to a massive fraud upon individual Americans by brokerage firms holding out as acting in their customers’ best interests when in fact such will not be the legal requirement – result in an even greater dissatisfaction by individual investors with all financial advisors, leading investors to not seek out the trusted, expert financial advice they so desperately need, fleeing the capital markets, and leading to a loss of capital formation which will, especially on a cumulative basis over many years, result in far less economic growth?”

Mr. Clayton: “You are attempting to draw a lot of dots there, Madam Chair.”

Committee Chair: “But these are not connections that are very difficult to draw, Mr. Clayton; this is fundamental economics. As Professor Columbo stated in a 2010 paper on reforming securities litigation, ‘Trust is a critically important ingredient in the recipes for a successful economy and a well-functioning financial services industry.’”

Mr. Clayton: “You are very well-read, Madam Chair.”

Committee Chair:r: “Someone in government should be, Mr. Clayton. Would you not agree that efforts to improve securities regulation should be informed by insights from economics and from other academic disciplines, Mr. Clayton, to ensure our limited government resources are put to best use. In fact, have you not – yourself – just been wasting the SEC’s precious resources, both now, and in the future, should Reg BI be finalized over strong opposition from two of your five Commissioners, since it is clear that a future SEC under a new Administration will have to unwind and fix the mess you are creating with this deeply malevolent rulemaking?”

Mr. Clayton: “The future is always uncertain, Madam Chair.”

Committee Chair:
“Perhaps, Mr. Clayton, but perhaps your own future is something you have been deeply thinking about. Mr. Clayton, I would now like to unveil how proposed Regulation Best Interests came to be. Is it not true that Regulation Best Interests was derived in large part from a proposal advanced by the Financial Services Institute and SIFMA, both broker-dealer industry lobbying organizations?”

Mr. Clayton: “Madam Chair, you appear to overstate their influence.”

Committee Chair: “But, Mr. Clayton, did not FSI and SIFMA propose actual language for a ‘Best Interest’ broker standard a few years before, which was subsequently endorsed in major part by FINRA. And did not FSI President Dale Brown himself state in early 2018: ‘Earlier this year we had meetings with [SEC] Chairman Jay Clayton and [SEC Director of the Division of Trading and Markets] Brett Redfearn and we are ... hearing that many of our themes that we’ve hit on in our advocacy’ were finding their way into the SEC’s proposals.”

Mr. Clayton: “He may have been bragging.”

Sullivan & Cromwell ... and conflicts?
Committee Chair:
“Chair Clayton, now I would like to understand the motivations behind your advancement of this deeply flawed proposed rule. Before you were appointed to the SEC, you were are partner in the New York City law firm of Sullivan & Cromwell, were you not?”

Mr. Clayton: “Yes.”

Committee Chair: “And while at that firm, you represented the interests of Wall Street firms, investment banks, and broker-dealer firms, such as Goldman Sachs, Bear Stearns, UBS, and Barclays Capital, did you not?”

Mr. Clayton: “Yes, Madam Chair, but …”

Committee Chair: “And, after your service at the SEC, since you are only age 52, is it not highly likely that you will go to work for a large Wall Street firm, or work again for a law firm that represents broker-dealer firms?”

Mr. Clayton: “Madam Chair, that is inherently speculative, and I resent the implication.”

Committee Chair:
“And is it not true that many, if not most, of the attorneys on the staff of the U.S. Securities and Exchange Commission who worked on this proposal, have either worked for broker-dealer firms, for law firms that represented broker-dealer firms, or will likely depart the SEC at some time in the future to join such broker-dealer firms or their legal counsel?”

Mr. Clayton: “Madam Chair, the SEC requires industry expertise in its staff, and I resent the implication that we have a ‘revolving door’ at the SEC”

Committee Chair: “I am certain that there are many staff attorneys at the SEC who desire to do the right thing. I only question whether they possess effective leadership at the present time, Mr. Clayton.”

Mr. Clayton: “I disagree.”

Flowery language
Committee Chair:
“So, permit me at this time to summarize what Regulation Best Interest is, or, rather, what it is not. Reg BI imposes little that restricts brokers from engaging in conduct that they engage in currently. There is no actual requirement that brokers avoid significant material conflicts of interest. Nor is there any actual requirement, in the rule, despite the flowery language contained in the release, that brokers properly manage any unavoided conflicts of interest. There is no actual requirement that a brokerage firm, or its brokers, place its customers’ interests before its own. Are these not fair statements about your proposed Reg BI, Mr. Clayton.”

Mr. Clayton: “But I do believe that Regulation Best Interest will raise the standards of conduct of brokers.”

Committee Chair:
“But not substantively, Mr. Clayton, as we have just observed in our review of the actual language of the proposed rule. Very little if any restrictions on broker’s conduct will exist, beyond the weak restrictions found under the current suitability rule. In fact, Reg BI seeks to redefine the term ‘best interests’ and its accepted meaning in the law and in the English language. Much the same as the SEC redefined what ‘solely incidental’ means over the past several decades, in order to accommodate brokers who migrated away from investment product sales and toward giving investment advice.”

Mr. Clayton:Mr. Clayton: “I do not agree with that characterization, Madam Chair.”

Committee Chair:
“Is not Regulation Best Interest, which originated from broker-dealer lobbying organizations, and which proposals were subsequently endorsed in large part by FINRA – the broker-dealer ‘self-regulatory organization’ – and which was subsequently pushed through at the SEC by industry lobbyists as well as those insiders with deep ties to Wall Street – just a means to misrepresent to the American people the true nature of the obligations of broker-dealers to their customers?”

Mr. Clayton: “I do not concur with your assessment.”

Committee Chair:
“Mr. Clayton, does not Regulation Best Interests create the mere illusion that brokers act in the best interests of their customers, in essence as acting under a fiduciary duty of loyalty, when in fact such is not the case?”

Mr. Clayton: “I don’t agree.”

Committee Chair: “Chair Clayton, did not the SEC, it 1940, in its Seventh Annual Report, state at one time: ‘the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States Court of Appeals … ‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest.
He who would deal at arm's length must stand at arm's length. And he must do so openly as an adversary, not disguised as confidant and protector. He cannot commingle his trusteeship with merchandizing on his own account ….”

Mr. Clayton: “I am not aware of the language from that Report.”

Committee Chair: “Then perhaps you will be aware of a more recent 1963 Study of the Securities Industry by the SEC, what stated that the U.S. Securities and Exchange Commission ‘has held that
where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [broker-dealer advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business ….”

Mr. Clayton: “I don’t recall that particular language from the 1963 Study, Madam Chair.”

Committee Chair: “So, Mr. Clayton, let me refer to something you should recall. In your testimony to the U.S. Congress in December, 2018, when you stated, ‘Simply put, under proposed Regulation Best Interest, a broker-dealer cannot put her or his interests ahead of the retail customer’s interests.’ Yet, as we have established here today, the term ‘best interests’ has an established meaning, in that it equates to the fiduciary duty of loyalty. And, as we have seen, Reg BI, with its safe harbor, does not actually require much above what the low suitability standard requires currently. Reg BI does not require that a broker’s interest be subordinate to that of the customer. Given such, then your testimony to the U.S. Congress has been false, and this proposed Regulation Best Interests is nothing but ‘Reg Bull $&*!’ in reality.

False news
Mr. Clayton: “I would not characterize my prior testimony as false, Madam Chair.”

Committee Chair:
“Then, SEC Chairman Clayton, I suggest that you reject truth, as you don’t appear to know the difference between ‘true’ and ‘false.’ Instead, you seek to make what is ‘false’ become ‘true’ by changing the English language. I further suggest to you that the SEC, once heralded as one of the most effective of government agencies, is in danger under your lack of effective leadership of falling into a dark hole. The SEC in recent decades has become the least effective of our government agencies, and apparently the SEC has now been captured by the very industry it regulates. Perhaps the SEC should be dismantled, and its regulation of market conduct transferred to a new, better agency. But, consideration of that issue is for another time. For now, the SEC appears to be aiding and abetting a massive securities fraud upon the American people. It is that plain. It is that simple. It is that undeniable. This hearing is in recess.”

Ron A. Rhoades, JD, CFP® is the Director of the Personal Financial Planning Program at Western Kentucky University’s Gordon Ford College of Business. A professor of finance, tax and estate planning attorney, investment adviser, and Certified Financial Planner™, he has long written about application of fiduciary law as the delivery of financial planning and investment advice. This article represents his personal views, and are not necessarily the views of any institution, organization, nor firm with whom he may be associated. Professor Rhoades’ comment letters regarding Reg BI and Form CRS, which detail legal authority for the statements set forth herein, can be found at the SEC’s web site.

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Jan 19, 2015 9:21 am

Part one of the Grand Deception (see STAN's GRAND DECEPTION topic in this forum) is to strongly imply, with words, language, and by every implication, that the investment customer is dealing with a trusted professional advisor/adviser, who will guide, protect and watch over the customer's best courses of action and best interests. (BAIT)

Part two of the Grand Deception is to substitute (bait and SWITCH) a broker, dealing representative (agent for the dealer) or salesperson, for the trusted professional fiduciary adviser that the customer thinks they are getting……below is a good summary of the second part of this process, although it carefully avoids one of the greatest elements of the suitability obligation since it is written by industry participants……the deception continues even in this case summary. Missing element will be disclosed at the end of this post.

THE Suitability Standard in Plain Language January, 2015 Source: ... 201240.pdf

The suitability standard is a relatively low standard of investment advice. It merely requires that a recommendation be suitable for an investor given his/her personal circumstances. It does (this should say "does not") have to be the best , lowest risk or best price. The suitability standard stands in contrast to the Best Interests Standard ( referred to as a fiduciary standard) that requires an advisor to act in the best interests of the client. Here is an extract from an MFDA Decision that succinctly articulates the fundamentals of the Suitability standard:
“...158. Existing jurisprudence establishes a three-stage process that advisors should follow to meet their suitability obligations. The three-stage process is described by the Alberta Securities Commission in Lamoureux, supra at p. 18:
Suitability is to be assessed prior to any investment recommendation by the registrant to a client. The process that culminates in a registrant’s investment recommendation to a client has three component phases or stages that must occur in sequence.
The first stage involves the “due diligence” steps undertaken by the registrant to “know the client” and to “know the product”. Knowing the product involves carefully reviewing and understanding the attributes, including associated risks, of the securities that they are considering recommending to their clients. Knowing the client was discussed above. Only after the “due diligence” of the first stage is completed, can the registrant move to the second stage in which they fulfill their obligation to determine whether specific trades or investments, solicited or unsolicited, are suitable for the client.
Suitability determinations . . . will always be fact specific. A proper assessment of suitability will generally require consideration of such factors as a client’s income, net worth, risk tolerance, liquid assets and investment objectives, as well as understanding an understanding of particular investment products. The registrant must apply sound professional judgement to the information elicited from “know your client” inquiries. If, based on the due diligence and professional assessment the registrant reasonably concludes that an investment in a particular security in a particular amount would be suitable for a particular client, it is then appropriate for the registrant to recommend the investment to that client.
By recommending a securities transaction to a client, a registrant enters the third stage of the process... At this stage, when making the client aware of a potential investment, the registrant is obligated to make the client aware of the negative material factors involved in the transaction, as well
as positive factors. The disclosure of material negative factors in the third stage of the process is intended to assist the client in making an informed investment decision.
159. There are several features of the suitability analysis that must be emphasized. These do not purport to be exhaustive, but are all relevant to the issues at this hearing.
160. First, an advisor is mandated to know the client, not merely those associated with the client. Information about the experience or sophistication of the client’s relative or friend, absent a power of attorney or similar legal authorization, is not a proxy for knowing the client or obtaining instructions from the client. Of course, a client may enlist friends or family to participate in meeting with an advisor, and in assisting the client in making investment decisions. However, it remains the advisor’s personal responsibility to ensure that an investment is suitable for that client, and that the client (not just a friend or family member) makes an informed decision based on an understanding of the potential downside to the investment. We also observe that it undermines supervisory and compliance safeguards to attribute the personal characteristics of friends or family members to the client in a KYC form
161. Second, the completion of a KYC form alone does not insulate advisors from a finding that the first stage of the suitability process has not been performed. The KYC form is merely one tool to facilitate fulfillment of the advisor’s obligation. Of course, a KYC form filled out by or with the involvement of the advisor in a perfunctory, incomplete, or inaccurate way undermines the validity of the suitability analysis. Equally important, the mischaracterization by an advisor of the client’s experience, investment horizon or objectives in a way that is designed to validate an otherwise unsuitable investment recommendation amounts to a serious breach of an advisor’s obligation to act in the client’s best interests. Similarly, the completion of inadequately explained forms such as acknowledgements or waivers does not mean that the advisor has met his or her disclosure obligation. Disclosure must be provided in a meaningful way so that the advisor can competently determine that the client both understands the risks and features of the products and strategies that are being recommended and is making an informed decision to proceed.
162. Third, the obligation to assess suitability rests with the advisor, and cannot be assumed only by the client, even where the client is aware of the risks associated with a particular investment or strategy.
163. Fourth, without purporting to describe all of the criteria in determining suitability, it can fairly be stated that an investment product or strategy is not suitable for a client unless, at a minimum, the client has the sophistication necessary to understand the relevant risks, the willingness to accept the risks and the capacity to withstand the potential adverse consequences that might result from those risks materializing.
164. Fifth, an investment product or strategy is not retroactively made unsuitable because it fails due to circumstances that were not reasonably foreseeable. Conversely, an advisor is expected to disclose to the client, at a minimum, reasonably foreseeable adverse conditions or risks that are material to an investment decision. An advisor’s belief that such reasonably foreseeable conditions or risks are unlikely to materialize does not relieve the advisor from this disclosure obligation. In this regard, we adopt with approval, the observations of the British Columbia Court of Appeal in Rhoads v. Prudential- Bache Securities Canada Ltd., [1992] B.C.J. No. 153 at p.8:
It ought to be reasonably foreseeable to any investment advisor that there might,at almost any time, be a market downturn that might prove to be of minor or major proportion and would impact, potentially substantially, the performance of an equity based mutual fund. Even though the precise timing of a downturn may not be predictable, the possibility of a downturn at any time is foreseeable. However, such an event would not necessarily be foreseeable to an investor.
165. Sixth, special considerations apply if a leveraged strategy is contemplated. As Staff accurately reflected at paragraph 69 of its written submissions, an advisor who is evaluating the suitability of a leveraged strategy must consider whether:
(a) the client has sufficient income or unencumbered liquid assets to be able to:
(i) withstand a market downturn without jeopardizing their financial security (including their ability to maintain their home);
(ii) meet a margin call (if potentially applicable); and
(iii) satisfy all loan obligations (both principal and interest) associated with the strategy without relying on anticipated income from the investments; and
(b) there is any reason to expect the client’s current sources of income to be reduced in the short term bearing in mind the client’s stage of life (age, anticipated retirement date, etc.), employment status and personal circumstances (e.g.; disability, pregnancy,any known risk of imminent anticipated job loss, etc.).
Stage three of the suitability analysis is of particular importance when a leveraged strategy is being recommended. The advisor must properly explain and ensure that the client understands how the investment product, including leveraging, works and the material risks associated with the implementation of the proposed strategy. This is simply a reflection of an advisor’s obligation to disclose to a client in relation to any investment product or strategy, the benefits and potential risks in a balanced, realistic and objective way. An advisor’s assessment of risk cannot be skewed by the advisor’s optimism in the strategy or by self-interest.
166. Seventh, the duty on an advisor to take positive steps to ensure that the recommendation is suitable and that adequate disclosure of the risks has been made is of particular importance where the client has limited investment experience or lacks financial sophistication.
167. Finally, an advisor is not entitled to make an unsuitable recommendation even if he or she discloses material negative factors about the product or strategy and regardless of whether the client claims to understand and accept the risks involved in the investment. It is unnecessary for us to address the situation in which an advisor is asked to implement a strategy against his or her recommendations since the Respondent does not allege that this scenario ever arose here.
The “Fair Dealing” Rule
168. In addition to the MFDA Rule governing unsuitability, MFDA Rule 2.1.1 (sometimes described as the “fair dealing” rule) is relevant to the allegations contained in the Amended Notice of Hearing. It articulates the standard of conduct imposed upon all Members and Approved Persons. It requires, among other things, that Members and Approved Persons:
(a) deal fairly, honestly and in good faith with clients;
(b) observe high standards of ethics and conduct in the transaction of business; (c) refrain from engaging in business conduct or practice which is unbecoming or
detrimental to the public interest; and
(d) be of such character and business repute and have such experience and training as is consistent with the standards of the industry. ...”
These basic principles are too often ignored when dealers provide their so-called Substantive Reponse to complainants. This why we continue to press regulators for reforms of the KYC process, enhanced risk profiling and better supervisory controls.
Kenmar Associates

Thanks to Kenmar for this information.
Source: ... 201240.pdf


Now for the most important element missing in the "suitability test". It is a measurement, comparison and customer informed evaluation of the COSTS of various investment recommendations. This is the essential part of the Grand Deception where the PAYOFF comes to the dealer/advisor. After fooling their customers into a false sense of trust, then substituting a commission salesperson instead of a fiduciary……the win for the dealer/salesperson is to then sell products which are to the greatest advantage to the dealer and not the customer. The difference is in the hundreds of billions silently transferred from the pockets of investors, into pockets of dealers.

See video on the suitability standard, from a recovering broker, who tells how it is a license to steal from clients rightful returns:
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sun May 25, 2014 6:10 pm


The Grand Deception.
By Stan Buell, founder of (Small Investor Protection Association) and Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager

Worth billions of dollars to investment dealers to hide........worth "half" your eventual retirement capital to discover.

1. There are two vastly differing standards of care for “advisors” who deal with investors:

(1) first is the fiduciary standard of care, which is roughly equivalent to a medical “do no harm” oath for investors.
(2) second is the suitability standard, which is suitably vague, subjective, self assessed by the seller, and allows investment dealers to sell the LEAST suitable of investment choices to investors and still meet this subjective standard.

The source of references for this point can be found at the Canadian Securities Administrators (CSA) where it is fairly difficult to uncover, and the SEC, where it is well disclosed. See 88 words from SEC Chair Mary Jo White in under two minutes on this subject at

2. The fiduciary standard of care is usually, but not always given by those persons who are duly licensed in the category of “adviser”, and this (adviser) is often found spelled in various legislation with an “e”. (ie Investment Adviser's Act of 1934, 1940, etc., USA, Securities Acts in 13 Provinces, Canada)

3. The “suitability” standard is most often applied to persons who in the US are licensed in the legal category called “broker”, and in Canada, the legal license category is “dealing representative”. Dealing representative was, until 2009, the category titled “salesperson”, when the name was changed to dealing representative. (All reference to the word "salesperson" were deleted from Securities Acts in 13 Canadian jurisdictions in Sept 2009)

This CSA web page explains that the role of “dealing representative” is “A sales person........ what they can sell depends on the firm they work for and their registration.” ... ion_EN.pdf

sources: USA broker license check Canadian broker license search

4. Persons referring to themselves as “advisor” are usually not licensed in either the “adviser” license category or a non-existent “advisor” license category. It is claimed by some regulators to be a non-legal, non registration "title" and by others to be a virtually identical term as “adviser” with an “e”.

Some regulators and experts say it is a separate and distinct term, while others, including some journalists and experts see no difference in the two spellings. These "dictionary" debates have three very large holes in them, and are also NOT the important point.
The POINT is whether consumers are being served by persons with a “do no harm” type of fiduciary duty, or a undefinable term like “suitability”
. The major secondary point is
whether consumers are being intentionally deceived
by spelling tricks, in order to pass one off as the other. Would the investment industry (and regulators) truly do this, and what would be their motivation?

5. The rather large holes mentioned in #4 above are this: IF the terms “advisor” and “adviser” are virtual “twins”, useable interchangeably for each other........THEN approximately 750,000 investment salespersons in the US and Canada are intentionally deceiving consumers into a false belief that they are licensed and registered as fiduciary “advisers”. This is a deceit tantamount to fraud, since those persons with a "broker" or dealing rep license have no right to tell customers that they are licensed as advisor or adviser. Neither is true.

( Additionally, as Stan points out, "If Advisor is same as Adviser they should have same legal responsibility shoudn't they?" )

IF, on the other hand, the two words carry different meanings, then those persons referring to themselves as “advisors”, while there is no legal license category for such a word, spelled in such a manner......are deceiving the public by
simply trying to pass off a spelling trick as an implied professional license
. This does not meet with securities laws, rules and policies, just two of which are shown below in point #6.

The third hole in the "dictionary debate" is that billions and billions of dollars can be documented as being shortchanged from investors, by industry persons who are misleading and deceiving customers by hiding the true license and duty of care categories. This goes well beyond playing dictionary games, and may in fact be
one of the greatest hidden risks facing an investor today

6. (from section 34 of the BC Securities Act)

Persons who must be registered

34  A person must not
(a) trade in a security or exchange contract,
(b) act as an adviser,
(c) act as an investment fund manager, or
(d) act as an underwriter,
unless the person is registered in accordance with the regulations and in the category prescribed for the purpose of the activity. ... #section34

and this from the MFDA (Mutual Fund Dealers Association of Canada)

The MFDA rule 1.21(d) prohibits MFDA members from using any business name or designation that deceives or misleads as to their proficiency qualifications.

IIROC and other securities regulators have similar rules, codes and laws against misrepresentation, either by commission or by omission. It occurs that when licensed persons refuse to disclose the true license category of their registration, and hide the “suitability” verses “fiduciary” differences involved, that there is a grand deception. It certainly fails the IIROC industry requirement to deal honestly, fairly and in good faith with the public.

7. Lastly: From “Understanding Misleading Financial Advisor Titles – Your Right to Know” Bryon C. Binkholder
"Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying. " Edward Waitzer article, Financial Post · Tuesday, Feb. 15, 2011) (Mr. Waitzer is a Bay Street Lawyer and former Securities Commission chair, and this quote ( by another person) appeared in his article.

Financial Advisor Chicanery: Imagine a two-tiered health care system in which some doctors were legally obligated to do what's right for their patients and others, like snake-oil salesmen of yore, could recommend whatever treatments made them the most money, as long as they didn't kill patients outright. Now imagine that the shysters did all they could to blend in with the real doctors. That's effectively the type of system we have today among the people Americans count on to tell them how to invest their life's savings. Registered investment advisors must, by law, put clients' interests first. Many thousands of other "advisors" at places like Morgan Stanley, Merrill Lynch and smaller shops are held to a much lower "suitability" standard. In essence, even though these people often refer to themselves as "financial advisors" or by some other comfort-inducing title, they're really glorified salesmen. Some do a great job serving their clients. Others don't. It's up to them. Under the law, as long as they avoid putting an 85-year-old widow into an exotic derivative with a 20-year lockup, they're bulletproof. Few clients know this fiduciary-suitability gap exists. The suitability crowd has worked tirelessly to keep the standard low and the distinctions murky. The cost to the public is incalculable but huge.

from this article Where Wrongdoing Still Thrives on Wall Street
Screen Shot 2014-05-28 at 8.41.23 PM.png ... 940-1.html


Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager


Twitter: @RecoveredBroker

Facebook group for Fraud victims

Facebook group for Fraud victims across Canada (Small Investors Protection Association of Canada, 1998)

Video site for victims of investment malpractice ... ature=mhee
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon May 12, 2014 3:16 pm

Screen Shot 2014-05-12 at 4.10.07 PM.png

Dear Mr. Elford:

Thank you for contacting the U.S. Securities and Exchange Commission (SEC) concerning the SEC's recent formation of the Investor Advisory Committee. You urge the SEC to establish clear policies that would assist the public in understanding the differences between when is advice given by investment advisers and broker-dealers.

The SEC’s Office of Investor Education and Advocacy processes many comments from individual investors and others. We keep records of the correspondence we receive in a searchable database that SEC staff may make use of in inspections, examinations, and investigations. In addition, some of the correspondence we receive is referred to other SEC offices and divisions for their review. If they have any questions or wish to respond directly to your comments, they will contact you.

Please refer to the Spotlight section on the Investor Advisory Committee at: for a general overview of the initiatives taken by the Investor Committee in areas such as Broker-Dealer Fiduciary Duty, Crowdfunding, and Decimalization and Tick Sizes. Specifically, you may want to review the information about the Investor Advisory Committee's recommendation on Broker-Dealer Fiduciary Duty to the SEC can be found at: You may want to periodically the this spotlight section for updated information about Investor Advisory Committee's initiatives.

Thank you for taking the time to communicate your views.

Amy Rosenthal
Investor Assistance Specialist
Office of Investor Education and Advocacy
U.S. Securities and Exchange Commission
(800) 732-0330
Comments of L. Elford on 265-28

The link to this study provides a great read about salespeople/brokers who use the "advisor" title to mimic the trust deserved of a licensed "adviser". ... n-2013.pdf

also pasted below:

Recommendation of the Investor Advisory Committee Broker-Dealer Fiduciary Duty

• Both broker-dealers and investment advisers play an important role in helping Americans organize their financial lives, accumulate and manage retirement savings, and invest toward other important long-term goals, such as buying a house or funding a child’s college education.
• When the federal securities laws were enacted, Congress drew a distinction between broker-dealers, who were regulated as salespeople under the Securities Exchange Act of 1934, and investment advisers, who were regulated as advisers under the Investment Advisers Act of 1940.

• Over the last several decades, however, the roles of some broker-dealers and investment advisers have converged. While differences remain, many broker-dealers today offer advisory services, such as investment planning and retirement planning, that are similar to the services offered by investment advisers. In addition, many broker-dealers use titles such as financial adviser for their registered representatives and market themselves in ways that highlight the advisory aspect of their services.

• Because federal regulations have not kept pace with changes in business practice, broker- dealers and investment advisers are subject to different legal standards when they offer advisory services. Those legal standards – a suitability standard for broker-dealers and a fiduciary duty for investment advisers – afford different levels of protection to the investors who rely on those services. Key differences include the requirements that investment advisers, as fiduciaries, act in the best interests of their clients and appropriately manage and fully disclose conflicts of interest that could bias their recommendations.

Investors typically make no distinction between broker-dealers and investment advisers, and most are unaware of the different legal standards that apply to their advice and recommendations. Although many investors don’t understand the meaning of “fiduciary duty,” or know whether it or suitability represents the higher standard, investors generally treat their relationships with both broker-dealers and investment advisers as relationships of trust and expect that the recommendations they receive will be in their best interests.

Investors may be harmed if they choose a financial adviser under a mistaken belief that the financial adviser is required to act in their best interest when that is not the case, receive recommendations that comply with a suitability standard but carry additional costs or risks without affording additional benefits, or fail to receive the on-going account supervision that they expect based on the manner in which brokers’ advisory services are sometimes marketed.

• Although they are more subtle and more difficult to measure than the harm that results from outright fraud, these types of harm can nonetheless have a significant impact on investors’ financial well-being. Despite the difficulty of quantification, the Committee believes it is essential that the economic analysis currently being undertaken by the Commission acknowledge both the existence and importance of investor harms of this type that can result from advice delivered under a suitability standard.


The Investor Advisory Committee believes that personalized investment advice to retail customers should be governed by a fiduciary duty, regardless of whether that advice is provided by an investment adviser or a broker-dealer.1 The Committee further believes that the fiduciary duty for investment advice should include, first and foremost, an enforceable, principles-based obligation to act in the best interest of the customer. In approaching this issue, the SEC’s goal should be to eliminate the regulatory gap that allows broker-dealers to offer investment advice without being subject to the same fiduciary duty as other investment advisers but not to eliminate the ability of broker-dealers to offer transaction-specific advice compensated through transaction-based payments. Though it may require both regulatory flexibility to permit the existence of conflicts of interest and some regulatory changes to reduce the most severe conflicts of interest in the broker-dealer business model, the Committee believes that advisory services offered as part of a transaction-based securities business can and should be conducted in a way that is consistent with a fiduciary standard of conduct.

Recommendation 1
The Commission should conduct a rulemaking to impose a fiduciary duty on broker- dealers when they provide personalized investment advice to retail investors.
A. The Committee favors an approach that involves rulemaking under the Investment Advisers Act to narrow the broker-dealer exclusion from the Act while providing a safe harbor for brokers who do not engage in broader investment advisory services or hold themselves out as providing such services.
B. Atthesametime,theCommitteerecognizesthattheCommissionisconsidering rulemaking under Section 913(g) of the Dodd-Frank Act. Should the Commission choose to conduct rulemaking under Section 913, the Committee supports the following approach:
a. In order to ensure that the standard is no weaker than the existing Advisers Act standard, any fiduciary rule adopted must incorporate an enforceable, principles-based obligation to act in the best interests of the customer.
1 While this recommendation deals specifically with advice to retail customers, the Committee notes that Dodd- Frank authorizes the SEC to extend fiduciary protections to other vulnerable market participants. The Commission should consider whether action beyond the retail arena is needed and appropriate.

b. In order to ensure the continued availability of transaction-based recommendations, any standard adopted should be sufficiently flexible to permit the existence of certain sales-related conflicts of interest, subject to a requirement that any such conflicts be fully disclosed and appropriately managed.
c. While recognizing that some forms of transaction-based payments would be acceptable under a fiduciary standard, the Commission should fulfill its Dodd- Frank mandate to “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.”
Supporting Rationale:
The Commission should conduct a rulemaking to impose a fiduciary duty on broker- dealers when they provide personalized investment advice to retail investors.
A broad consensus exists among widely disparate groups (representing investors, state securities regulators, investment advisers, and broker-dealers) that broker-dealers and investment advisers should be subject to a uniform fiduciary standard when they provide personalized investment advice to retail investors. In a recent letter to the Commission, the Securities Industry Financial Markets Association stated, for example, that it “has long supported a uniform fiduciary standard for BDs and RIAs when providing personalized investment advice about securities to retail clients.”2 Meanwhile, organizations such as the North American Securities Administrators Association (NASAA), Consumer Federation of America (CFA), AARP, Fund Democracy and the various investment adviser/financial planning groups have been calling for enhanced fiduciary protections for the advisory clients of broker-dealers for two decades or more. Adoption of a uniform fiduciary standard was also the recommendation of the SEC staff in its 913 Study.3
Rather than opposing fiduciary rulemaking, the leading broker-dealer trade associations have sought to ensure that any rules adopted provide sufficient clarity regarding their regulatory obligations and continue to permit them to offer traditional, transaction-based brokerage
2 July 5, 2013 letter from Ira D. Hammerman, Senior Managing Director and General Counsel, SIFMA, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, available here: 606/4606-3128.pdf. See also, July 5, 2013 letter from David T. Bellaire, Executive Vice President and General Counsel, Financial Services Institute to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, (available here:, which listed a uniform fiduciary standard as one component of a regulatory approach that can provide “widespread benefits to all stakeholders.”
3 SEC Staff, Study on Investment Advisers and Broker-Dealers, As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, January 2011 (available here:

services.4 While there are disagreements among the various stakeholder groups over some important implementation issues, there is general agreement that the Commission should adopt a regulatory approach that preserves the ability of brokers to offer transaction-specific recommendations compensated through transaction-based payments.5 In keeping with this goal, the various stakeholder groups also generally agree that the fiduciary duty should not apply to all brokerage services, but only to those services that fall within a reasonable definition of personalized investment advice to retail customers. The Committee shares these views.
The limited opposition that exists to rulemaking in this area is based first on the argument that broker-dealers are already extensively regulated under existing state and federal laws and self-regulatory organization rules. While this is true, it is largely irrelevant to the question of what standard should apply when broker-dealers provide personalized investment advice to retail customers. Put another way, the question is not whether broker-dealers are adequately regulated when they act as salespeople but whether they are adequately regulated when they act as advisers. In the view of the Committee, the existing securities regulatory scheme that treat broker-dealers as salespeople does not offer adequate investor protection when broker-dealers offer advisory services, since under a suitability standard they generally remain free to put their own interests ahead of those of their customers. As SIFMA stated in its recent comment letter to the SEC, “a uniform fiduciary standard would result in a heightened focus on serving the best interests of retail clients.”
Some others have suggested that regulation is not needed because investors are capable of choosing for themselves whether they prefer to work with a broker-dealer operating under a suitability standard or an investment adviser who is a fiduciary. This might have been true if the Commission had over the past several decades adopted a regulatory approach that maintained a bright line between broker-dealers and investment advisers. But that has long since ceased to be the case. As the RAND Study,6 the SEC’s recent financial literacy study,7 and numerous outside surveys have all documented, investors today do not have the tools to make an informed choice. Specifically, investors do not distinguish between broker-dealers and investment advisers, do not know that broker-dealers and investment advisers are subject to different legal standards, do not understand the differences between a suitability standard and a fiduciary duty, and expect broker- dealers and investment advisers alike to act in their best interests when giving advice and making recommendations. This is the natural result of regulatory policy that has allowed brokers to rebrand themselves as advisers without being regulated as advisers.
4 See, for example, the July 14, 2011 letter from Ira D. Hammerman, SIFMA Senior Managing Director and General Counsel, to SEC Chairman Mary Schapiro regarding a “Framework for Rulemaking under Section 913 (Fiduciary Duty) of the Dodd-Frank Act” (File No. 4-604).
5 See, for example, March 28, 2012 letter from CFA, Fund Democracy, AARP, Certified Financial Planner Board of Standards, Inc., Financial Planning Association, Investment Adviser Association, and National Association of Personal Financial Advisors to SEC Chairman Mary Schapiro (available here: 606/4606-2973.pdf), which provides a framework for rulemaking that seeks to enhance investor protection without sacrificing investor choice.
6 Hung, Angela A. et al, Technical Report: Investor and Industry Perspectives on Investment Advisers and Broker- Dealers, sponsored by the U.S. Securities and Exchange Commission, RAND Institute for Civil Justice, 2008 (available here: ... report.pdf).
7 Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors (As Required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act), August 2012.

In light of the evidence that the blurring of the lines between broker-dealers and investment advisers has made it difficult, if not impossible, for typical retail investors to make an informed choice between broker-dealers and investment advisers, the Committee believes that a regulatory solution that reduces the potential for investor harm is necessary. As the SEC staff stated in the 913 Study, “Retail investors are relying on their financial professional to assist them with some of the most important decisions of their lives. Investors have a reasonable expectation that the advice that they are receiving is in their best interest. They should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations.”
The Commission has a range of options available to it for achieving this regulatory goal. These include the approach recommended in Section 913(g) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. But the Commission also has other grounds for action, including existing authority under the Investment Advisers Act to regulate non-incidental advice by broker-dealers. In deciding on the optimal regulatory approach, the Commission should weigh its various options with an eye toward determining which will best ensure an outcome that strengthens investor protections, preserves investor choice with regard to business models and compensation methods, and is workable for broker-dealers and investment advisers alike.
A. The Committee favors an approach that involves rulemaking under the Investment Advisers Act to narrow the broker-dealer exclusion from the Act while providing a safe harbor for brokers who do not engage in broader investment advisory services or hold themselves out as providing such services.
The Committee believes that the dual goals of strengthening investor protections while preserving investor choice could best be achieved through rulemaking under the Advisers Act. By significantly narrowing of the broker-dealer exclusion from the Investment Advisers Act, such an approach would restore the functional regulation intended by Congress when it adopted the ’34 and ’40 Acts. Under such an approach, broker-dealers who choose to offer personalized investment advice to retail investors, such as retirement planning or investment planning, that goes beyond the buy/sell recommendations inherent to securities transactions would be regulated in the same fashion as other investment advisers when they engage in those advisory activities.8 Broker-dealers who “hold themselves out” as advisers, based either on the titles they use or the manner in which they market their services, would be precluded from relying on the exclusion. (This is consistent with the approach the Commission adopted with regard to accountants and attorneys when it was first interpreting how the Advisers Act applied to those professionals who held themselves out as financial planners.)9
One significant benefit of such an approach is that it would provide a firm assurance that the fiduciary standard for investment advice by broker-dealers and investment advisers would be the same and would be no weaker than the existing standard. It would, for example, ensure that the existing legal precedent, staff interpretations, and no-action positions developed under the
8 The Commission would still need to define what activities by broker-dealers constitute investment advice subject to regulation under the Advisers Act and which do not. Non-advisory activities by these broker-dealers would continue to be regulated under the Securities Exchange Act.
9 See, for example, SEC Investment Advisers Act Rel. No. 770 (1981) as well as SEC Rel. No. IA-1092 (1987).

Advisers Act and accompanying rules would also apply to investment advice by brokers. And it would achieve this without the necessity of creating a whole new parallel body of law under the ’34 Act. To the degree that specific aspects of that existing body of Advisers Act law and interpretation would need to be amended or revised for the purpose of applying it to the broker- dealer business model, that could be accomplished through adoption of appropriate rules and guidance under the Advisers Act.10
Under this approach, there would be minimal risk that existing investor protections would be weakened as a result of efforts to accommodate the broker-dealer business model. Under such an approach, broker-dealers who wish to avoid regulation under the Advisers Act could do so by limiting themselves to transaction-specific recommendations while avoiding holding themselves out as advisers or as providing advisory services. In order to ensure clear communication to investors, it may also be necessary for the Commission to require some sort of affirmative disclosure in such circumstances to the effect that the broker-dealer is acting solely as a salesperson and not as an objective adviser. Broker-dealers who complied with these conditions would in effect have a safe harbor from Advisers Act regulation.
Brokerage firms would then face a clear business decision: do the benefits of offering advisory services and marketing themselves accordingly outweigh the costs of regulation under the Advisers Act? Faced with a similar decision when the courts determined that fee-based accounts were advisory accounts, most broker-dealers chose to accept regulation under the Advisers Act. We believe the outcome would be similar in this instance. But investors would also benefit even if certain broker-dealers chose to avoid Advisers Act regulation if the result was that those broker-dealers stopped characterizing their services as advisory services when making recommendations that are not required to promote the best interests of the customer. Thus, this approach would also preserve investors’ ability to choose to receive transaction-based advice subject to a fiduciary duty or non-advisory transaction-based services subject to a suitability standard, and their ability to distinguish between those different types of services would be enhanced.
B. At the same time, the Committee recognizes that the Commission is considering rulemaking under Section 913(g) of the Dodd-Frank Act. Should the Commission choose to conduct rulemaking under Section 913, the Committee supports the following approach:
a. In order to ensure that the standard is no weaker than the existing Advisers Act standard, any fiduciary rule adopted must incorporate an enforceable, principles-based obligation to act in the best interests of the customer.
10 This is the approach that the Commission has taken in the wake of the court decision requiring all fee-based accounts to be regulated as advisory accounts. Without taking a position on the temporary principal trading rules adopted by the Commission in the wake of that decision, the Committee believes this show the feasibility of providing targeted carve-outs for broker-dealers from Investment Advisers Act rules that are incompatible with the broker-dealer business model. The goal in devising any such carve-outs should be to ensure that the best interests of the customer are protected.

b. In order to ensure the continued availability of transaction-based recommendations, any standard adopted should be sufficiently flexible to permit the existence of certain sales-related conflicts of interest, subject to a requirement that any such conflicts be fully disclosed and appropriately managed.
c. While recognizing that some forms of transaction-based payments would be acceptable under a fiduciary standard, the Commission should fulfill its Dodd-Frank mandate to “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.”
The Committee recognizes that, since passage of the Dodd-Frank Act, much of the impetus behind fiduciary rulemaking has had as its source the authorizing language contained in Section 913(g) of that act. In insisting that the fiduciary standard be the same for broker-dealers and investment advisers and no weaker than the existing Advisers Act standard, Section 913 provides an appropriate basis for rulemaking. Importantly, it recognizes that a fiduciary duty that is identical in principle is, because of its facts-and-circumstances-based application, flexible enough to be applied differently in different circumstances and to different business models. This is key to developing an approach that strengthens investor protections without unduly limiting investor choice.
However, the statutory language of Section 913 poses some significant implementation challenges as well. Specifically, it includes provisions specifying that certain prevalent broker- dealer business practices – such as earning commissions, selling proprietary products, and selling from a limited menu of products – should not automatically be deemed to constitute a violation of the fiduciary standard. It intentionally avoids applying Advisers Act provisions with regard to principal trades to brokers, but without specifying how principal trades by brokers should be regulated under a fiduciary standard. And it specifies that brokers would not have an on-going duty of care “after” the advice is rendered. Depending on how certain of these provisions are interpreted and enforced – particularly those with regard to selling from a limited menu of products and the on-going duty of care – such an approach could result in a significant weakening of the existing Advisers Act standard.
We encourage the Commission to arrive at a rule based on Section 913 that is strong and effective, but it is also possible that rulemaking under Section 913 could weaken protections for investors who receive advice from investment advisers without providing meaningful improvement in protections for those who invest through broker-dealers. For example, if the Commission were to interpret Section 913 as permitting sale from a menu of products so limited as to preclude any recommendation from that menu’s being in the best interests of the customer, that would leave unchallenged some of the most troubling practices permitted under the suitability standard. Similarly, if the Commission were to interpret Section 913 as permitting broker-dealers to switch in and out of a fiduciary duty even where there is an on-going relationship with that client and an implication of ongoing account management, such an
approach could leave investors more confused than ever and at greater risk of being misled. 11 Furthermore, Section 913 anticipates that the Commission would undertake parallel rulemaking under both the Investment Advisers Act and the ’34 Act and produce rules that are the same for broker-dealers and investment advisers. Because new rules would supersede past interpretation of the Advisers Act standard, any weaknesses in the rules adopted in order to accommodate the broker-dealer business model and the specific directives in the Section 913 statutory language would have a spill-over effect, weakening existing protections under the Advisers Act for clients of investment advisers. The Committee would strongly oppose such a result and urges the Commission to avoid this outcome at all costs.
In order to do so, the Commission must include, in its definition of fiduciary duty, an enforceable principles-based obligation to act in the best interests of the customer. This is consistent with the statutory language of Section 913(g), which authorizes the Commission to “promulgate rules to provide that the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be 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.” Such an interpretation is also consistent with the recommendation of the SEC staff in its 913 Study, which notes that an important distinction between the fiduciary duty and suitability standard is the inclusion in the fiduciary duty of an obligation to act in the best interests of clients.
The Committee believes this legislative mandate can be achieved through a fiduciary rule that requires all those who provide personalized investment advice to retail investors to have a reasonable basis for believing their recommendations are in the best interest of the customer. In addition to performing the analysis necessary to determine the customer’s best interest (comparable to the current know-your-customer obligations), those providing investment advice should be required to document the basis for their belief that their recommendation is in the customer’s best interests. Such an approach would not require broker-dealers to avoid all conflicts of interest. But it would require them to attempt to act in their customers’ best interests despite their conflicts of interest, put policies and procedures in place to better ensure compliance, and hold them accountable when they fail to do so.
Both SIFMA and FSI have voiced support for a fiduciary standard that includes a best interest obligation. Their key concern has been to ensure that they have adequate guidance before a rule is finalized for how that standard would be applied in the context of the broker- dealer business model. The Committee agrees that brokers and investors alike will be best served if brokers understand their obligations under a new fiduciary standard. In the Committee’s view, however, it would be a mistake to try to spell out every aspect of a broker’s fiduciary obligations through rules. Instead, the Commission should adopt guidance before the
11 The Committee believes that it is important that an ongoing fiduciary duty apply in circumstances in which broker-dealers hold themselves out in ways that imply they are providing ongoing account oversight and management. Thus, the ongoing duty of care would not apply to all brokerage services, but only in those instances in which a reasonable expectation of ongoing advice had been created. If the Commission were to proceed with rulemaking under Section 913, it would be important that it interpret the provision regarding ongoing duty of care in a way that is consistent with this principle.

rule is implemented to help clarify how the fiduciary duty in general and the best interest obligation in particular would apply in the context of the transaction-based broker-dealer business model. The guidance should cover the key issues brokers are likely to face in adapting to the new standard. While avoiding an overly prescriptive rules-based approach, the Commission should supplement that guidance by adopting supporting rules in areas such as disclosure obligations where more specific standards are needed. Such an approach would provide the clarity that brokers need while preserving the flexibility of the fiduciary duty as a facts-and-circumstances-based standard.
Another way to ensure that the rule is compatible with the broker-dealer business model is for the Commission to adopt a regulatory approach that permits the existence of certain sales- related conflicts of interest while requiring that any such conflicts be disclosed and appropriately managed. Toward that end, we recommend that the Commission adopt a rule that requires broker-dealers and investment advisers who provide personalized investment advice to retail customers: to identify any material conflicts of interest that a reasonable investor would view as compromising their ability to act in the customer’s best interest; to develop a plan for appropriately managing those conflicts to ensure that the best interests of the customer prevail; to have policies and procedures in place designed to ensure that the individuals providing the advice have a reasonable basis for believing their recommendations are in the best interest of the customer and document the basis on which they reached that conclusion; and to monitor compliance. Such an approach should preserve the ability of broker-dealers to receive transaction-based compensation and preserve this option for customers who prefer to receive transaction-based advice.
At the same time, the Dodd-Frank Act requires the Commission to “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.” We believe it is of important for the Commission to conduct this analysis both as part of its fiduciary rulemaking and as an ongoing aspect of its market oversight. Where it finds practices that are clearly inconsistent with a broker-dealer or investment adviser’s fiduciary obligations and that cannot be appropriately managed through other means, it has an obligation to act through rulemaking to limit or ban those practices. As previously discussed, outright prohibitions would not be appropriate in instances where conflicts can be managed through other means and where the provider of the investment advice can document a reasonable basis for believing recommendations are in the best interest of the customer.
Recommendation 2
As part of its rulemaking, the Commission should adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers at the start of the engagement, and periodically thereafter, that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record.
Supporting Rationale:

The Committee does not believe that disclosure alone is sufficient to address the harm that can result when broker-dealers are free to offer “advice” that puts their own interests of ahead of the interests of their customers. On the other hand, we do believe that improved disclosure should be included as part of any fiduciary rulemaking. One area needing improvement is the disclosure investors receive to help them select a financial professional. While investment advisers are required to provide pre-engagement disclosure to all prospective clients, broker-dealers are not subject to a comparable requirement.
We believe investors would benefit from receiving uniform, plain English disclosure documents from broker-dealers and investment advisers covering key factors that are relevant to the selection of an investment professional.12 Relevant topics might include: What services do you provide? What and how do I pay? How are you compensated? What are your conflicts of interest? Are there other limitations on your services? What is your professional background? Are there any blemishes on your disciplinary record? And, particularly if the Commission fails to adopt a uniform fiduciary standard, what is your legal obligation to me?
The ADV form that investment advisers use to disclose to their clients provides a reasonable starting point for designing such a document. However, we encourage the Commission to continue to review the ADV form to determine whether it could be further refined to make it a more user-friendly document. The results of the SEC’s recent financial literacy study suggest that additional work may be needed to improve investors’ ability to make good use of disclosed information whose significance they struggle to comprehend. Among other things, we encourage the Commission to develop an approach to disclosure of disciplinary record that makes it easier for investors to assess the significance of disclosed events, particularly for firms that may have a large number of relatively insignificant technical violations. As part of that analysis, the Commission should look at whether it might be beneficial to adopt a layered approach to such disclosures, with the goal of developing a more abbreviated, user-friendly document for distribution to investors. In general, we would encourage the Commission to work with disclosure design experts to ensure that any document it develops is effective in conveying the relevant information to investors in a way that enables them to act on that information.
12 While the content of the disclosures would vary to reflect differences in the businesses of broker-dealers and investment advisers, the topics covered, format, and presentation of the information should, to the degree possible, be consistent.
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Apr 25, 2014 5:02 am

I found this good info on Peter Benedek's good blog and email updates called

The posts I found are well arranged and were in the topic titled Category Advisors/Fiduciary found here

The insight in this post was a biblical reference, if you can imagine. Of all places to find reference to the idea of a fiduciary. here's an excerpt that caught my eye while researching fiduciary info:

In a nutshell A fiduciary duty requires the fiduciary to place the interests of the client ahead of one’s own. Consider fiduciary in the context of the ancient wisdom of the Bible which very sensibly suggests not placing an obstacle before the blind.

The rest can be found here: ... t-interes/

I have followed Peter's writing for some time now and find him an indispensable voice for good investor information.

Peter retired after working 30 years as an engineer, and found time devote himself to studying finance and investments. He was serious enough about this to complete the CFA program of study, the highest level of study in my opinion.

His writing is informed, insightful, helpful and contains the rarest element in the world today, and that is UNCONFLICTED HONESTY. There is almost nowhere an investor can go today without being preyed upon by investment experts with a hungry agenda.

Peter is a breath of fresh air in a world otherwise filled with investment salespeople, all disgusied as investment helpers......thanks Peter for continuing to pump out good information to help people. I am proud to have met and talked to you.

Larry Elford
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