August 11, 2010
Compliance costs-both in terms of finances and time - are high, and those costs are eventually felt by clients. Adding another layer of regulation means another layer of compliance, and even more cost to clients.
Discuss the specific licenses you hold and what is involved in complying with each license.
How frequently are you examined?
Give specific examples of how much time you (or someone in your office) spend on compliance. How much paperwork is involved? Have you had to hire someone into your office whose sole job is keeping up with compliance?
Are there areas of compliance that do not add any consumer protection in your view?
How do the compliance requirements impact your ability to serve your clients?
Let the SEC know what the liabilities of a fiduciary duty could mean for your costs and your ability to serve your clients.
Will moving to a fee-only model result in better, unbiased advice?
Will you be forced to a fee only model to protect yourself from liability?
Can your clients afford to pay up front fees or will they be willing to?
Will the liabilities drive up your errors and omissions coverage?
Will you stay in the business if liabilities become too great?
Background: As has been widely reported by NAIFA and the media, we played a leading role in working with Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) to include the SEC study in the recently-passed Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the study is for the SEC to conduct the first ever comprehensive analysis of the regulatory environment governing broker-dealers and investment advisers and to determine if any regulatory gaps or overlaps exist that are harmful to consumers. Without the study, Congress was set to move forward with imposing a legal fiduciary duty on all broker-dealers and their registered representatives who provide advice to clients. The premise behind the effort is based on the perception that the fiduciary duty governing investment advisers provides greater investor protection than the suitability standard governing broker-dealers.
What This Means:
The study provides an opportunity for NAIFA members who are registered representatives to explain to regulators how the suitability standard is applied and enforced in the real world versus the fiduciary duty governing investment advisers. The goal of this effort is to give regulators their first ever look into how regulations trickle down from the SEC, through FINRA, broker-dealers, and then on to Main Streetprofessionals like you. Based on the feedback the SEC receives, the Dodd-Frank Act requires the SEC to write rules to address any gaps or overlaps in regulation that are found to be harmful to consumers. Following the study, the SEC is poised to impose a fiduciary standard on broker-dealers and their registered representatives unless your public comments convince them otherwise.
What the Fiduciary Standard Could Mean for NAIFA Members:
The Dodd-Frank Act permits the SEC to require that all broker-dealers be held to the same legal fiduciary requirement investment advisers have when providing advice to clients. Should the SEC choose to use that authority, the fiduciary duty as defined by the Dodd-Frank Act would require that all broker-dealers be held to a legal and vaguely defined standard "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."
While NAIFA members believe they are already acting in the "best interest" of their clients, the Act does not define what the rules are for compliance with a legal "best interest" standard - thus subjecting registered representatives to the potential of never ending lawsuits. For example, is "best" the cheapest recommended product? The "best" premium relative to the benefit of the product? The product with the "best" historic underwriting and service standards? Is it the one from the carrier with the "best" rating? The fiduciary standard in essence adds a vague legal liability standard that looks back (sometimes after many years) and is enforced after the fact by the SECor trial lawyers who have perfect vision in hindsight.