This article originally appeared on FAMagazine.com by Tracey Longo
The Institute for the Fiduciary Standard sent a letter to Securities and Exchange Commission Chairman Gary Gensler earlier this week asking the agency to fix confusion surrounding registered investment advisors’ use of the word “fiduciary” in their customer relationship summaries (CRS)—a disclosure all types of advisors and brokers must now deliver to prospects and clients.
The required three-to-four-page summaries are part of the SEC’s Best Interest investment advice regulations and are supposed to provide enough information about services, conflicts and costs so that consumers can comparison shop among different financial professionals.
RIAs, unlike brokers, are required by fiduciary law to put their clients’ interests first—a fact they believe is an important differentiator for investors to understand. But the institute says that SEC guidance and staff advice have confused most RIAs and their compliance consultants into excluding or removing the word “fiduciary” from their customer summaries.
“We heard [investment advisors] say explicitly they were advised by their compliance consultants to not mention fiduciary status,” Institute President Knut Rostad said.
In fact, an Institute study of 30 RIA firms found that only six with assets between $1 billion and $3 billion mentioned the word “fiduciary” in their summaries and only two of the six described what it meant.
One large RIA told the institute that on an “SEC outreach call” a junior SEC staff person told RIAs that citing fiduciary status is not allowed, Rostad added.
“Many IAs believe they are not permitted to cite and describe their fiduciary status on CRS. The institute urges the commission to prioritize addressing this misunderstanding because it undermines the core role, purpose and vitality of the Investment Advisers Act of 1940,” Rostad said in the letter.
The SEC did not respond immediately to a request for comment. But the agency’s original directions on CRS don’t mention the word fiduciary and new staff guidance from the regulator on Dec. 17 specifically faulted RIAs for using the term fiduciary in certain sections of Form CRS.
The SEC warned in the guidance that “many firms included the proposed conversation starters and/or proposed standard of conduct language (i.e., ‘We are held to a fiduciary standard that covers our entire investment advisory relationship with you.) rather than the required language as adopted (i.e., ‘we have to act in your best interest and not put our interest ahead of yours’).”
Rostad urged the agency to clear up the source of the misunderstanding and provide additional guidance “that states IAs may cite and describe their fiduciary status on CRS. The misunderstanding involves the difference between prescribed language and elective language, and clarifying that adding elective language must be done without changing or otherwise altering the current prescribed language.”
The concern is that the SEC “is trying to level the playing field, not for true fiduciaries, but for those who are conflicted, such as securities and product sales people,” Peter Mafteiu, principal of Sound Compliance Corp., told Financial Advisor magazine.
“For the SEC to say that Reg BI is a universal best interest standard is just inaccurate. Dually registered advisors are only fiduciaries at the time they make a recommendation,” added Mafteiu, who is helping RIA firms use the word fiduciary in their Form CRS.
Rostad said that while many regulatory fixes can be complex and difficult, correcting the shortfall on Form CRS is not. “The solution here is clear and straight-forward. inform IAs they may cite and describe their fiduciary status on CRS,” he said.
