Analysis of the SEC Staff’s Study on Investment Advisers and Broker-Dealers

January 28, 2011

Late in the evening on Friday, January 21, the Securities and Exchange Commission (SEC) Staff released its Study on Investment Advisers and Broker-Dealers (the Study), which was required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). As expected, the SEC Staff recommends rulemaking to establish a uniform fiduciary standard for investment advisers and broker-dealers that is consistent with the standard that currently applies to investment advisers under the Investment Advisers Act of 1940 (the Advisers Act). Specifically, the Staff recommends the adoption of the following uniform fiduciary standard based on the statutory language in the Dodd-Frank Act:

[T]he standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.

Summary of Staff Recommendations

In addition to recommending the establishment of a uniform fiduciary standard, the SEC Staff recommended that the SEC undertake the following actions, among others, to facilitate the implementation of the recommended uniform fiduciary standard and harmonize the broker-dealer and investment adviser regulatory regimes:

  • Duties of Loyalty and Care:
    • Engage in rulemaking and/or issue interpretive guidance addressing the components of the uniform fiduciary standard: the duties of loyalty and care.
    • Consider specifying uniform standards for the duty of care owed to retail investors, through rulemaking and/or interpretive guidance.
  • Disclosure and Advertising:
    • Prohibit certain conflicts and facilitate the provision of uniform, simple, and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers.
    • Consider whether the disclosure requirements in Form ADV and Form BD should be harmonized.
    • Consider articulating consistent substantive rules and/or guidance for broker-dealers and investment advisers regarding the content and review of advertisements and other customer communications.
  • Principal Trading: Address through interpretive guidance and/or rulemaking how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading
  • Personalized Investment Advice: Engage in rulemaking and/or interpretive guidance to explain what it means to provide "personalized investment advice about securities." Here, the SEC Staff recommended that, at a minimum, the definition should include "recommendations" as understood under the broker-dealer regulatory scheme and exclude "impersonal investment advice" as understood under the investment adviser regulatory scheme.
  • Solicitation Arrangements: Consider whether to provide additional guidance or harmonize regulatory requirements to address the status of finders and solicitors and their respective disclosure requirements concerning the conflicts associated with the solicitor's and finder's receipt of compensation.
  • Supervisory Requirements: Review supervisory requirements for investment advisers and broker-dealers to determine whether harmonization would facilitate the examination and oversight of these entities and consider whether to provide additional guidance or engage in rulemaking.
  • Registration, Licensing, and Continuing Education: Consider requiring investment adviser representatives to be subject to federal licensing and continuing education requirements; consider whether to harmonize broker-dealer and investment adviser registration processes, including whether to subject investment advisers to a substantive review prior to registration.
  • Books and Records: Consider whether to modify the Advisers Act books and records requirements, including by adding a general requirement to retain all communications and agreements consistent with the standard applicable to broker-dealers.

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