Recovering Losses caused by Investment Misconduct

New Advocate Posed to Heat Up Universal Fiduciary Standard Debate

Industry professionals and scholars have teamed up to launch the Institute for the Fiduciary Standard, a new nonprofit organization dedicated to advocating for the uniform adoption of the fiduciary standard. ("Fiduciary Standard Gets Powerful Advocate," InvestmentNews, Aug. 28, 2011).

"Misunderstandings abound about what "fiduciary' means," Knut Rostad, president and a founding member of the Institute for the Fiduciary Standard, said in a statement. "The institute provides a permanent platform to build a full program of advocacy and education on this important public issue."

The Institute's launch is yet another development in the heated debate over whether broker-dealers should be held to the same standard of care as investment advisers - a standard of care that includes providing guidance based on the clients' best interests, and disclosing all material conflicts of interest.

Generally, unlike investment advisers, broker-dealers are held only to a standard of suitability, which translates into a significantly lower standard of care - one that investors don't always understand.

"The suitability standard allows brokers to conceal most conflicts of interest from their clients and to escape any obligation to control investment expenses," Mr. Rostad wrote in a letter to the Editor of the NY Times. "For example, brokers do not have to tell a client when they are compensated more for selling certain products than others. Worse still, they aren't obligated by law to recommend the lower cost of two products with equivalent investment characteristics and comparable performance records."

The SEC recommended the adoption of a universal fiduciary standard in January. Less than two months later, the U.S. Department of Labor proposed applying the fiduciary standard to IRAs, a change that would greatly expand the number of financial professionals who would be considered "fiduciaries." (For more, read our March 9 blog post.)

Unfortunately for investors - who would greatly benefit from the expanded application of the standard - those opposed to the universal fiduciary standard have been as vocal and adamant in their opposition as the SEC and investor advocates have been in their support. A fact that only points to the need for a newer and more powerful advocate.

The Institute plans to meet with varying governmental authorities, including: members of Congress, the SEC, and the Labor Department, throughout the next few "critical" months and beyond. A Sept. 9 panel discussion on disclosure rules has already been scheduled.

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