Avoiding Harm in Harmonization of Fiduciary Standards

John Iekel

First, do no harm. A term commonly applied to the practice of medicine, but a recent blog post by Christopher Carosa applies it to fiduciary practices.

In “Fiduciary Standard Quandary: First Avoid ‘Harm’onization,” FiduciaryNews’ Carosa argues that while the DOL fiduciary rule may be fairly straightforward, there may be a more delicate dance to be done than many may think when it comes to reconciling the thrust of the Securities Exchange Act of 1934 and the Investment Advisors Act of 1940 on the one hand, and that of the DOL rule on the other.

Carosa says that the 1934 act originated the suitability standard — that advice should be suitable to the needs of an investor and take into consideration such factors as his or her income, net worth, risk tolerance, time horizon, liquidity needs and tax situation. But the DOL rule goes beyond that, Carosa argues. He cites Dan Moisand, Principal at Moisand Fitzgerald Tamayo, LLC, as saying that the fiduciary standard requires seeking the best for clients, “while suitability just requires ‘avoiding bad,’” as well as Kathleen McBride, founder of FiduciaryPath and editor of the FP Fiduciary Survey, who says that “under suitability, the customer must prove wrongdoing by the broker.”

Carosa notes that there is an argument made by some that disclosure may be seen as a loophole to compliance with the rule. And there, he suggests, is where harm may arise from harmonization. He cites Moisand, who contends that “Reliance on more disclosure as a remedy will water down the standard and provide weak consumer protection.”

And harmonization can give rise to practical problems, Carosa posits. He cites Skip Schweiss, managing director, Advisor Advocacy & Industry Affairs, TD Ameritrade Institutional: “The ’40 Act has worked quite well for 77 years now as a principle under which investment advisers are held. The other two standards are different, one higher and one lower. They each stem from different laws, regulations, case histories, and oversight and enforcement bodies. To ‘harmonize’ them, you’d have to either raise or lower one or more of the standards. I suspect that there would be strong industry opposition to ‘topping up’ to the ERISA standard. And there would likely be pushback from various constituents to reducing the higher standards to a lower level.”

“The very term ‘harmonization’,” says Carosa, “implies compromise. And because of that, he notes, some people, such as SEC Officer of Investor Advocate Rick Fleming, contend that it “might lead to a worse definition of ‘fiduciary’” and worry that “harmonization may dilute the current high fiduciary standards of registered investment advisers.”

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