Securities and Exchange Commission Could Establish Uniform Fiduciary Standards of Conduct Applicable to Investment Advisors and Broker-Dealers

By Elaine Wood

The Obama Labor Department aimed to protect investors—particularly those with retirement accounts—from nefarious brokers motivated by high commissions and a misguided confidence in the fact that standards of conduct applicable to “investment advisers” in the securities industry did not apply to “brokers.”

Enter a new twist on the Employee Retirement Income Security Act of 1974 (ERISA). The Fiduciary Duty Rule requires brokers as well as investment advisors (or any person making a recommendation or solicitation) in a retirement account (such as an IRA or 401k account) to “adhere to basic standards of impartial conduct, prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.” Prior to the Fiduciary Duty Rule, brokers generally did not owe a fiduciary duty to their customers, even in retirement accounts. As the Fiduciary Duty Rule came into being, forecasters predicted the Icarusian plummet of brokers’ hubris.

President Trump’s directive ultimately delayed the applicability date of the DOL’s Fiduciary Rule to June 9, 2017. Prior to the rule’s proposed implementation, President Trump issued a memorandum in February instructing the Secretary of Labor to “prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule.” On May 22, the Department of Labor and Department of Treasury issued formal non-enforcement policy statements regarding the Fiduciary Rule. Opponents to the Fiduciary Rule argue that it restricts individual freedoms to make financial decisions. Proponents emphasize its measures to protect the retirement assets of vulnerable customers.

By applying the Fiduciary Duty Rule, “[t]he Department of Labor has done what the Securities and Exchange Commission is unable to do: create an enforceable best-interest standard and reign in conflicts that aren’t in the best interest of the investor,” said Barbara Roper, director of investor protection at the Washington, D.C.-based Consumer Federation of America.

Unable to do? That may soon be in the past. The SEC’s recent solicitation of public data and comment letters signals a massive effort to reevaluate its current regulatory standards-of-conduct practices for members of the securities industry. The public forum takes seriously the merits of establishing uniform fiduciary standards of conduct: a “best interests standard of conduct” for all investors, not just retirement investors. Not only could the Commission establish uniform fiduciary standards of conduct applicable to investment advisers and broker-dealers, it could standardize practices applicable to anyone who gives “investment advice.” With this invitation for public comment, the SEC has shown that the universal fiduciary standard is not dead and may yet become the industry standard for all investment advice.


Should Investors Consider Emerging Markets?

By Pablo Pazos

Like any other investment opportunity, there are great benefits and potential risks to investing in emerging markets. It is important to understand what emerging markets are and the associated benefits and risks that an investor must consider.

Emerging market economies are often referred as those countries whose economies are experiencing rapid growth and are progressing into an advanced economy. According to Investopedia, common characteristics of emerging markets include having a “market exchange, a regulatory body, and liquidity in local debt and equity markets” as well as an established financial infrastructure that includes banks, a stock exchange, and a unified currency. There is no definitive consensus on which countries are deemed emerging markets, but the International Monetary Fund (IMF), Morgan Stanley Capital International (MSCI), the Standard and Poor’s and Russell indexes, and the Dow Jones have provided a current list of countries and which each institution classifies as an emerging market economy. Countries that appear on each one of those lists include: Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand, and Turkey.

With expected growth of two or three times faster than developed nations, emerging markets can outperform returns from securities in developed markets. Furthermore, an investor can diversify his or her portfolio by investing in emerging markets that may not be affected by economic slumps of mature economies, thus allowing the investor to attain some returns on a portfolio that may experience loss in value from its domestic securities. For example, after the United States housing crash and resulting credit crisis, it was emerging markets like Brazil, India, and China that saved the world market.

However, investors should consider the significant risks that come with investing in emerging markets. First, returns from securities in emerging market economies may lose value when investors acquire their returns in weak local currencies that need to be converted into dollars. Additionally, some countries may lack the ability to pay back their debts and the political climate can be unfriendly to foreign investments. Government seizures of private companies or regulatory authorities that prove to be ineffective in preventing corruption or insider trading may result in the loss of foreign investment and value of emerging markets securities. For example, JBS, the world’s largest meatpacking company (based in Brazil), suffered a 30% decrease in valuation in Brazil’s stock market after revelations of potential insider trading and bribery from JBS executives with government officials.

There is an ever-increasing growth of investment opportunities outside developed markets that investors should contemplate when seeking growth in their portfolio, but this should be done with the consideration of the risks that may affect the value of such investments.