NASAA Rebuts SIFMA Testimony on Legal Standards of Care

The North American Securities Administrators Association (NASAA), the Consumer Federation of America, and the Investment Adviser Association have called upon Congress to apply a fiduciary duty to all financial professionals who give investment advice regarding securities. Writing in a joint comment letter to Chairman Christopher Dodd and Ranking Member Richard Shelby of the Senate Banking Committee, the commenters sought to rebut recent testimony from the Securities Industry and Financial Markets Association (SIFMA) concerning the legal standards of care owed to investors by broker-dealers and investment advisers. Although agreeing that investor protection would be strengthened if a consistent legal standard governed the provision of investment advisory services, they strongly disagreed with SIFMA that the standard should be anything less than a fiduciary duty. Accordingly, the commenters urged Congress to extend fiduciary standards to all entities providing investment advice, regardless of their licensing status.

The commenters rejected SIFMA's recommendation of a "universal standard of care" that expresses, in plain English, principles of "fair dealing." They acknowledged the superficial appeal of such a standard, one apparently based on the good faith and fair dealing requirements in arm's length transactions between commercial parties under the Uniform Commercial Code. The commenters strongly believe, however, that the application of this commercial standard to the relationship of financial service providers and their clients would greatly diminish investor protection. Rather, they asserted that the investor protection benefits of investment adviser fiduciary standards, under which advisers have an affirmative duty to act in the best interests of their clients and to make full and fair disclosure regarding conflicts of interest, should be extended to anyone who offers investment advice, including broker-dealers.