The Stifel Letter

Dear Secretary Acosta and Chair Clayton,

I am the Chairman and CEO of Stifel Financial, a position I have held for 20 years as part of my 35 years in financial services. I feel compelled to personally write to each of you today to identify, what I believe, is a constructive and practical solution to politically charged issues that you have both inherited:

• How to construct and implement a workable standard of care across different service models so that there is one, uniform standard for both brokerage accounts under the Securities Exchange Act of 1934 (Brokerage Accounts) and advisory accounts under the Investment Advisers Act of 1940 (Advisory Accounts); and
• How to harmonize such standard with the requirements of the Department of Labor’s (DOL) new fiduciary rule for retail retirement assets.

To achieve these twin objectives, I believe that the Securities and Exchange Commission (SEC) should create a single standard of care applicable to both Brokerage and Advisory Accounts, while recognizing the inherent differences between the constructs of Brokerage and Advisory relationships.

In simple terms, Brokerage relationships are non-discretionary, commission-based accounts, through which a financial professional provides episodic investment advice incidental to each transaction. By contrast, in an Advisory relationship, a financial professional generally provides ongoing investment advice and monitoring and charges a level fee, generally based on assets.

In certain circumstances, due, in part, to the additional provision of continuous investment advice and monitoring, Advisory Accounts are generally more expensive for clients. In this regard, Brokerage Accounts may provide a more economical alternative for those clients who do not want ongoing advisory services, for example, those who do not wish to receive ongoing investment advice, who trade less frequently, or who prefer a less expensive account alternative.

Both models were developed for specific reasons and both models need to continue to exist. These models offer choice to consumers who participate in the markets and maximize the efficient and effective transfer of capital from savers to entrepreneurs. Ultimately, our capital markets thrive and consumers benefit because both the Brokerage and Advisory business models co-exist and are readily available in the marketplace. We hope that the regulators will continue to recognize the benefits of each service model and continue to support the consumers’ access to both.

The approach outlined in this letter articulates a standard of conduct that provides consumers and financial professionals both clarity and consistency regardless of whether they have a Brokerage, Advisory or both types of relationships.

SEC Should Adopt the Concept of the “Impartial Conduct Standards” as a Universal Standard of Care Applicable to Both Brokerage and Advisory Relationships

As the SEC and DOL consider and coordinate on developing appropriate standards of conduct for retail retirement and taxable accounts, I propose a simple solution: the SEC adopt a principles-based standard of care for Brokerage and Advisory Accounts that incorporates the “Impartial Conduct Standards” as set forth in the DOL’s Best Interest Contract Exemption. The “Impartial Conduct Standards” require investment professionals and financial institutions to:

• Always act in a prudent manner, while addressing their personal financial conflicts;
• Receive no more than reasonable compensation; and
• Fairly disclose information regarding their advice, compensation, and material conflicts of interest.

Under this construct, consumers will easily understand that the “Impartial Conduct Standards,” and the three principles thereof, apply to each and every one of their relationships with a financial professional and financial institution, notwithstanding the type of account the consumer maintains—namely, Brokerage or Advisory Accounts (or both).

Though this uniform standard should be largely principles-based, it would be in the interest of all parties to set forth and explain the differences between the Brokerage and Advisory models to the consumer at the inception of a relationship with financial professional, perhaps using a standard format. Through my long experience serving clients in this industry, it has become readily apparent that it is the individual circumstances of each individual consumer that are of ultimate consequence when ascertaining whether an Advisory or Brokerage account is the appropriate choice for such consumer. In some cases an Advisory Account may be best for the customer while, in others, a Brokerage Account may better serve the customers’ needs.

The following visual depicts the overlay of a universal standard of care over both the Brokerage and Advisory service models.

I believe that, under the proposed approach, all consumers will know and understand that regardless of which service model is utilized, financial professionals and financial institutions will adhere to the universal standard of care—the Impartial Conduct Standards.

Implementation

Adopting the Impartial Conduct Standards as the new SEC standard of care will be less challenging than an alternative approach because:

1.  The financial services industry is currently operating under the Impartial Conduct Standards for retail retirement accounts (including IRAs) under the Best Interest Contract Exemption. The DOL determined that adherence to these fundamental norms “helps ensure that investment recommendations are not driven by advisor conflicts, but by the best interest of the retirement investor.” As such, the Impartial Conduct Standards may be an appropriate foundation for the SEC to consider in developing its standard of care.
2. With respect to non-retirement Brokerage Accounts, FINRA currently requires that “a broker’s recommendations must be consistent with the customer’s best interests”. The FINRA suitability rule already prohibits a Brokerage Account advisor from placing his or her interests ahead of the customer’s interests. Additionally, current FINRA rules contain language requiring financial professionals to “make no material misleading statements” and “charge no more than reasonable compensation”. Therefore, the adoption of a new SEC Impartial Conduct Standard will enhance the existing FINRA rule.

Under this approach, all relationships, Brokerage and Advisory, retirement and taxable accounts, would be subject to the Impartial Conduct Standards. Simply put, consumers will know that regardless of the type of account they maintain, their financial professional is acting impartially and in the consumer’s financial interest.

As the SEC studies the impact of adopting the Impartial Conduct Standards for all Advisory and Brokerage Accounts, it is important that it also works with the DOL to harmonize the standards and requirements that apply to retirement accounts (including IRAs). Thus, with the Impartial Conduct Standards already in place for retirement accounts, the DOL and SEC should move together and conduct a proper and fulsome study of whether additional requirements are needed to achieve appropriate consumer protections while maintaining investor choice. As the DOL and SEC study these issues, and to prevent further disruption to Brokerage and Advisory business models, it is critical that the DOL delay the January 1, 2018 implementation date for the additional conditions of the Best Interest Contract Exemption, including the contractual warranties, until a solution is determined.

Further, I believe that, with respect to the DOL fiduciary rule, to achieve consistency between retirement and taxable accounts, the following should be done:

1. The DOL regulation defining an investment advice fiduciary should be changed such that financial professionals and institutions do not become fiduciaries simply by the act of providing a recommendation (defined by the DOL as a mere suggestion). This definition is far too broad as a threshold for fiduciary status. Rather, financial institutions and professionals should be able to define the limits of their fiduciary status and obligations through agreements with investors.
2. The additional provisions of the Best Interest Contract Exemption (BICE) should be eliminated. The implementation of the Impartial Conduct Standards would alleviate the need for, and confusion associated with, the additional provisions of the BICE, including the related warranties, the written disclosure requirements, and the private right of action. These conditions are far too prescriptive and expose financial institutions to significant class action risks. Eliminating these conditions will allow Brokerage models to continue to exist, while appropriately balancing consumer protections with investor choice.
3. Broad class exemptions from retirement account prohibited transactions (e.g., principal trades, IPO’s, etc.) that require only compliance with the Impartial Conduct Standards should be promulgated. It is important to understand the negative implications the current DOL fiduciary rule has on investor choice and capital formation. Therefore, I would be remiss if I did not address the issue of the current prohibition on the ability of retirement accounts to invest in IPO’s. I wrote an op-ed piece addressing this issue. I believe my op-ed speaks directly to this issue.

Section 913

Under Section 913 of the Dodd-Frank Act, the SEC was required to conduct a study to determine whether a uniform fiduciary standard that applies equally to Brokerage and Advisory Accounts when investment professionals provide personalized investment advice about securities to retail customers was needed (the “913 Study”). The 913 Study was issued in January 2011.

The statutory language in Section 913 indicates that the SEC may promulgate rules to implement a uniform fiduciary standard for Brokerage Accounts, and the standard shall be “no less stringent than” the general fiduciary duty implied under Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”). Section 913 does not mandate implementation of a Section 206 fiduciary standard for Brokerage Accounts, and I believe adopting this standard would be a mistake.

It is important to recognize that Brokerage and Advisory Accounts serve different purposes and client needs and are governed by different regulatory regimes, each with unique requirements. Depending on whether the account is Brokerage or Advisory, the requirements of one could be viewed as “more stringent” when compared to the other. For example, the FINRA suitability rules and record-keeping requirements for Brokerage Accounts could be viewed as “more stringent” than the requirements of the ’40 act while the prohibition on the sale of IPOs in Advisory Accounts could be viewed as more stringent than the requirements of the ’34 act.

Given my experience, the SEC would not be able to implement a uniform fiduciary standard that is “no less stringent than” the Advisors Act standard without effectively eliminating the Brokerage Account business model. As outlined above, both Brokerage and Advisory accounts are needed. Creating artificial obstacles which effectively eliminate the ability to offer customers Brokerage Accounts would dramatically and unnecessarily limit the choice of business models available to investors (often resulting in higher fees) and it would have a significant negative impact on capital formation and jobs. In my view, it is not economically feasible to implement a uniform fiduciary standard following the suggested language in Section 913.

I believe the SEC should use its statutory authority to adopt a rule that creates a single Impartial Conduct Standard for Brokerage Accounts and Advisory Accounts, which incorporates the language in the DOL Impartial Conduct Standard. This solution would protect customers and be business model neutral.

Conclusion

As an industry leader, I look forward to continuing to engage in discussions with both of you as you study and address these issues. I believe establishing a single, uniform standard, as outlined above, will allow different business models to continue to exist, will give American businesses clear direction and simplicity in how they set up their compliance programs to adhere to that standard, and will protect Americans’ abilities to meet their retirement objectives while preserving investor choice. I am eager to work with you to address these issues in a constructive and practical way so that we can continue our business of creating and preserving wealth for the American people.

I look forward to discussing this approach in more detail.

Sincerely,

Ronald J. Kruszewski

Chairman & CEO