Securities Industry Concerned About Consumer Financial Protection Draft, Supports Draft Creating Federal Fiduciary Standard for Brokers and Advisers

The securities industry fears that draft legislation creating a Consumer Financial Protection Agency with broad new powers could inadvertently encroach on the jurisdiction of the SEC and CFTC. In testimony before the House Small Business Committee, SIFMA also said it favors draft legislation creating a new uniform federal fiduciary standard for brokers and advisers. However, SIFMA opposes the piece of the draft authorizing the SEC to prohibit pre-dispute arbitration clauses in broker-dealer and investment advisory agreements with retail customers.

While Treasury officials have reiterated that the Consumer Financial Protection Act is not intended to supersede the broad investor protection mandate of the SEC and CFTC, SIFMA believes that the Act’s broad jurisdictional grant to the new agency could potentially overlap with SEC and CFTC jurisdiction. SIFMA urged Congress to provide a full exclusion for investment products and services regulated by the SEC or the CFTC. As currently drafted, the legislation excludes only a narrow list of activities of some of the persons regulated by the SEC, such as broker-dealers and investment advisers.

Arguably, continued SIFMA, the SEC’s authority over transparency and disclosure, including its exclusive ability to mandate issuer disclosure in proxy statements and annual reports, also would be called into question. To avoid overlapping jurisdiction, said SIFMA, Congress should exclude from the jurisdiction of the CFPA any securities activity and any person, product or other activity that is regulated by the SEC or the CFTC.

SIFMA applauded Congress for recognizing that, when broker-dealers and investment advisers engage in the identical service of providing personalized investment advice about securities to individual investors, they should be held to the same standard of care. Conversely, when broker-dealers are not providing personalized securities investment advice to individual investors, such as when they are executing orders for customers, or engaging in market-making, there is no cause for modifying the existing, extensive regulatory regime that governs broker-dealers. The proposed Investor Protection Act acknowledges these important
distinctions, noted SIFMA, and would authorize the SEC to adopt rules creating a new, uniform, federal standard.

Individual investors deserve, and SIFMA strongly supports, a new federal fiduciary standard of care that supersedes the existing fiduciary standards, which have been unevenly developed and applied over the years, and which are susceptible to multiple and differing definitions and interpretations under existing federal and state law. The legislation must ensure that the new standard functions as a unitary and exclusive standard that is uniformly and even-handedly applied at the federal level to both investment advisers and broker-dealers when they provide personalized investment advice about securities to individual investors. Congress successfully followed a similar approach when it restructured federal-state securities regulation through the National Securities Markets Improvement Act of 1996.

The new federal standard must be sufficiently flexible to be adapted to the products, services and advice chosen by the investor, emphasized SIFMA, and applied only in the context of providing personalized investment advice about securities to individual investors.

In SIFMA’s view, the legislation must make clear that subjecting a financial professional to the new federal standard does not create any presumption that the financial professional is providing investment advice or is a fiduciary for purposes of any other federal or state laws. This clarification will enable broker-dealers to continue to provide investors choice of investment products, particularly in IRAs.

Congress favors, and the Supreme Court has expressly approved, the use of pre-dispute arbitration clauses in broker agreements. Further, a SIFMA study found that securities arbitration is faster and less expensive than litigation and benefits small investors. In SIFMA’s view, prohibiting such clauses would essentially be tantamount to doing away with securities arbitration. SIFMA suggested further study on this issue.

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