The SEC’s Investor Advisory Committee (“IAC”) recently recommended a framework for a new fiduciary duty standard applicable to broker-dealers providing personalized investment advice to retail customers.1
The IAC’s recommendations encourage the SEC to adopt rules pursuant to the SEC’s authority under the Investment Advisers Act of 1940 (“Advisers Act”) to regulate non-incidental advice by broker-dealers, rather than pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), as amended by Section 913(g) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).2 While the IAC also outlines an alternative framework for rulemaking pursuant to Section 913, it makes clear that it views Section 913 as posing “significant implementation challenges,”3 and that it provides the alternative recommendations only in view of the potential for the SEC to insist on rulemaking under Section 913.4 The IAC’s recommendations may come as a disappointment to many in the broker-dealer community who support the adoption of a uniform fiduciary duty, but prefer that it be done pursuant to the Exchange Act.
After providing some background on Section 913 and various comments the SEC has received, this Alert summarizes the IAC’s recent recommendations. It then analyzes the implications of a new fiduciary duty for broker-dealers, including in light of FINRA’s suitability rule and related guidance.
A. Section 913
Section 913 of the Dodd-Frank Act (which was signed into law on July 21, 2010) directs the SEC to conduct a study to evaluate the effectiveness of current regulatory standards of care for brokers, dealers, investment advisers, and associated persons,5 and, taking into account public input, comments, and data, issue a report on that study (“Section 913 Report”).6 Section 913 delineates fourteen considerations to be addressed in the Section 913 Report.7 Included among them are:
(i) the potential impact of eliminating the exclusion from the definition of “investment adviser” under Section 202(a)(11)(C) of the Advisers Act for a broker-dealer that provides investment advice that is “solely incidental to the conduct of his business as a broker or dealer” and that “receives no special compensation therefore” (the “Broker-Dealer Exclusion”),8 and
(ii) the potential impact of imposing on broker-dealers the standard of care applied under the Advisers Act to the provision of personalized investment advice about securities, and other requirements of the Advisers Act.9
Additionally, Section 913 amended Section 15(k) of the Exchange Act to authorize (but not mandate) the SEC to promulgate rules (informed by the findings of its Section 913 Report) to impose a new standard of care on broker-dealers providing personalized investment advice about securities to retail customers (and other customers as determined by the SEC), consistent with the fiduciary duty applicable to investment advisers under Section 211 of the Advisers Act.10 Section 913 also provides that “[n]othing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.” 11
Existing Standards of Care
Traditionally, broker-dealers and investment advisers have been subject to different duties of care: a suitability standard for broker-dealers, and a more stringent, fiduciary duty for investment advisers. The suitability rule, as revised effective July 9, 2012 in the form of FINRA Rule 2111,12 requires a broker to have a reasonable belief that (i) a given securities transaction or strategy is appropriate for the broker to recommend to someone (reasonable basis suitability), (ii) the transaction or strategy is appropriate for the broker to recommend to the particular customer based on the customer’s investment profile (customer-specific suitability), and (iii) a series of transactions (in addition to being individually suitable for the customer) is not excessive or otherwise unsuitable when viewed as a whole (quantitative suitability).13 As the Second Circuit explained in an oft-cited case, de Kwiatkowski v. Bear, Stearns & Co., Inc., “a broker ordinarily has no duty to monitor a nondiscretionary account, or to give advice to such a customer on an ongoing basis. The broker’s duties ordinarily end after each transaction is done....”14 The fiduciary duty, in contrast, imposes an ongoing duty on investment advisers to act in the best interests of their clients and appropriately manage and fully disclose conflicts of interest.15
Despite these well-established distinctions, FINRA may be reading a fiduciary duty requirement into its new suitability rule. For example, in Regulatory Notice 12-25, FINRA states that the suitability obligation includes a requirement to act in the “best interests of the client.”16 Likewise, at FINRA’s Annual Conference on May 21, 2012, FINRA’s Chairman and CEO, Richard Ketchum, discussed a firm’s suitability obligations relative to complex products, stating, “before any complex product is offered to a retail client, your financial adviser should be able to write down on a single page why this investment is in the best interests of your client.”17 More recently, FINRA and Mr. Ketchum have suggested that a cultural shift is warranted in which broker-dealers incorporate a best-interest-of-the-customer standard into their internal policies: In October 2013, FINRA issued its “Report on Conflicts of Interest,” stating that “[a]n effective practice is to add to a firm’s code of conduct, or other appropriate documents, a best-interest-of-the-customer standard . . . [for] personalized recommendations to retail customers.”18 A couple weeks later at the 2013 SIFMA annual conference in New York, Mr. Ketchum cautioned, “I don’t make up rules when they don’t exist,” but reinforced his earlier comment: “Our rules relate to suitability and our rules relate to fraud, but I think that firms would have far better controls if they put those type of processes in place — and many have, in terms of building it into their culture.”19
For its part, the SEC has not acted on its new rulemaking authority under Section 15(k) of the Exchange Act, and, indeed, seems to have made slow progress toward deciding whether to adopt a uniform fiduciary standard rule. What it has accomplished is the completion of its Section 913 Report, which it released in January 2011. In it, the SEC reports confusion by retail customers about the different standards of care governing investment advisers and broker-dealers, and makes two recommendations: (i) the adoption, pursuant to Section 913, of a uniform fiduciary standard for investment advisers and broker-dealers when providing personalized investment advice about securities to retail customers,20 and (ii) harmonization of certain regulatory requirements of broker-dealers and investment advisers where such harmonization appears likely to enhance meaningful investor protection, taking into account the best elements of each regime.21
In March 2013, the SEC issued a request for data and other information — and in particular quantitative data and economic analysis — relating to the costs and benefits of implementing a uniform fiduciary standard.22 The comment period ended in July 2013.23 The SEC apparently has yet to complete its anticipated cost-benefit analysis. While one IAC member characterized the IAC's recent recommendation that the SEC adopt a uniform fiduciary standard rule as its signal to the SEC to “move this to the front burner,”24 the SEC appears unmoved by the hint: The SEC’s regulatory agenda for its new fiscal year (released after the IAC’s recommendations) slates the “Personalized Investment Advice Standard of Conduct” for “long-term action,” and lists it as its 40th priority out of 43 items.25
B. Comments on Section 913 by Interested Parties
Perhaps weighing on the SEC’s willingness to move forward with any rulemaking is the ongoing controversy about whether, and how, to adopt a uniform fiduciary standard. Some of the disagreement appears to be internal, with possible opposition from at least one of the commissioners.26
Interested parties have submitted thousands of comment letters to the SEC (both before and after issuance of the Section 913 Report), making a wide array of suggestions, mostly concerning how to implement a uniform fiduciary standard as opposed to whether to do so.27 Here are the positions some leading industry groups as well as FINRA have taken:
II. The IAC’s Recommendations
A. The IAC
The IAC’s views, as detailed below, appear to make an effort to strike a compromise between the divergent views that interested groups have expressed. Section 911 of the Dodd-Frank Act established the IAC to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and initiatives to protect investor interests, and to promote investor confidence and the integrity of the securities marketplace.42 To that end, the Dodd-Frank Act authorizes the IAC to submit findings and recommendations for review and consideration by the SEC.43
Section 911 requires that the IAC be comprised of the SEC's “Investor Advocate,”69 a representative of State securities commissions, a representative of the interests of senior citizens, and not fewer than ten, and not more than twenty, members appointed by the Commission who “represent the interests of individual equity and debt investors in mutual funds”; “represent the interests of institutional investors, including the interests of pension funds and registered investment companies”; “are knowledgeable about investment issues and decisions”; and “have reputations of integrity.”44 The SEC did not appoint the IAC members until almost two years after the Dodd-Frank Act was enacted into law,45 and received some criticism for the delay, including by Commissioner Aguilar.46 The IAC is comprised of twenty-one individual members drawn from various arenas, who, according to SEC Chair Mary Jo White, “represent a wide variety of investor interests.”47 The chair of the Investor as Purchaser Subcommittee (which drafted the Recommendations), Barbara Roper, fits the bill of representing investor interests: Roper serves as Director of Investor Protection for the Consumer Federation of America, and was among the signatories to the Joint Comment Letter.48 Given that the IAC is essentially a vehicle for small investor input, it is not surprising that its favored approach is rulemaking under the Advisers Act (which regulates investment advisers as fiduciaries to their customers) rather than under the Exchange Act (which regulates broker-dealers as salespersons whose interests may, at times, be in conflict with those of their customers).
B. The IAC’s First Recommendation
Significantly Narrowed Broker-Dealer Exclusion Under the Advisers Act
The IAC’s favored approach is for the SEC to use its rulemaking authority under the Advisers Act to propose rules “significantly narrowing” the Broker-Dealer Exclusion from the Advisers Act.50 The recommended rule would impose a fiduciary duty on brokers when they provide “personalized investment advice” to retail investors, while providing a safe harbor for brokers who do not engage in “broader investment advisory services” or hold themselves out as providing such services.51 According to the IAC:
Under such an approach, broker-dealers who choose to offer personalized investment advice to retail investors, such as retirement planning or investment planning, that goes beyond the buy/sell recommendations inherent to securities transactions would be regulated in the same fashion as other investment advisers when they engage in those advisory activities. Broker-dealers who “hold themselves out” as advisers, based either on the titles they use or the manner in which they market their services, would be precluded from relying on the exclusion.52
Beyond the above, the IAC does not delineate the distinction between activities constituting “personalized investment advice” and activities subject to the safe harbor, except to note in a footnote that the SEC will need to define that distinction and that “[n]on-advisory activities by these broker-dealers would continue to be regulated under the Securities Exchange Act.”53
The IAC explains that this approach would “ensure that the existing legal precedent, staff interpretations, and no-action positions developed under the Advisers Act and accompanying rules would also apply to investment advice by brokers.”54 A broker-dealer that wishes to take advantage of the safe harbor could do so by limiting itself to transaction-specific recommendations, avoiding holding itself out as an adviser or as providing advisory services, and making an affirmative disclosure that the broker-dealer is acting solely as a salesperson and not as an objective adviser.55
Rulemaking Pursuant to the Exchange Act, as Authorized by Section 913
The IAC also makes an alternative recommendation for rulemaking pursuant to the Exchange Act, as amended by Section 913(g), while explaining that this approach is disfavored because Section 913 poses some “significant implementation challenges.”56 According to the IAC:
[Section 913] includes provisions specifying that certain broker-dealer business practices — such as earning commissions, selling proprietary products, and selling from a limited menu of products — should not automatically be deemed to constitute a violation of the fiduciary standard. It intentionally avoids applying Advisers Act provisions with regard to principal trades to brokers, but without specifying how principal trades by brokers should be regulated under a fiduciary standard. And it specifies that brokers would not have an on-going duty of care “after” the advice is rendered. Depending on how certain of these provisions are interpreted and enforced — particularly those with regard to selling from a limited menu of products and the on-going duty of care — such an approach could result in a significant weakening of the existing Advisers Act standard.57
Nonetheless, should the SEC choose to conduct rulemaking under the Exchange Act, the IAC supports a three-prong approach:
i. To ensure the standard is no weaker than the existing Advisers Act standard, any fiduciary rule adopted must incorporate an enforceable, principles-based obligation to act in the best interests of the customer.
ii. To ensure the continued availability of transaction-based recommendations, any standard adopted should be sufficiently flexible to permit the existence of certain sales-related conflicts of interest, subject to a requirement that any such conflicts be fully disclosed and appropriately managed.
iii. While some forms of transaction-based payments would be acceptable under a fiduciary standard, the SEC should fulfill the Dodd-Frank Act’s mandate to “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the [SEC] deems contrary to the public interest and the protection of investors.”58
C. The IAC’s Second Recommendation
The IAC’s second recommendation is that the SEC adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers at the start of an engagement, and periodically thereafter, that covers basic information about the nature of services offered, fees and compensation, conflicts of interest and disciplinary record.59 Among other things, such disclosures would aim to alleviate some of the confusion investors reportedly experience between the standards of care applicable to investment advisers and broker-dealers.
The IAC explains that it believes improved disclosure should be included as part of (but not the sole component of) any fiduciary rulemaking, and suggests that the ADV form that investment advisers use provides a reasonable starting point for designing a new disclosure document.60
The IAC’s recommendations appear geared towards striking a compromise between the divergent opinions competing industry groups have expressed. On the one hand, its favored approach would significantly limit the Broker-Dealer Exclusion, while on the other, it would leave room for broker-dealers to continue to operate under a business model that retains certain distinctions from that of investment advisers. The recommendations also mind the broker-dealer industry’s and FINRA’s concerns about the continued existence of separate legal frameworks (the Advisers Act and the Exchange Act) governing different providers and services. Nonetheless, some of the IAC’s criticisms of Section 913 call into question whether rulemaking narrowing the Broker-Dealer Exclusion would protect broker-dealer interests sufficiently. Among other things, there is the risk that the IAC’s preferred approach leaves room for consigning to the scrap heap the standard expressed in de Kwiatkoski — that “giving advice... does not alter the character of the relationship by triggering an ongoing duty to advise in the future (or between transactions) or to monitor all data potentially relevant to a customer’s investment.”61
The devil would be in the details. Whether the concerns the broker-dealer community has expressed will come to fruition will depend largely on how any proposed uniform fiduciary duty rule defines the distinction between “personalized investment advice” (subject to a fiduciary duty) and activities within the “transaction-specific recommendations” (subject to a safe harbor).62
Wherever the line of demarcation may be drawn, when a uniform fiduciary standard is read in conjunction with FINRA’s new suitability rule and its interpretive guidance, it could pose practical issues. Under FINRA Rule 2111, the customer-suitability obligation requires a member or associated person to exercise reasonable diligence to ascertain the customer’s investment profile,63 and to analyze all investment profile factors “unless the member or associated person has a reasonable basis to believe, documented with specificity, that one or more of the factors are not relevant components of a customer’s investment profile in light of the facts and circumstances of the particular case.”64 In Regulatory Notice 13-31, FINRA implied an expectation that, unless a firm has met this obligation to document with specificity its basis for concluding that missing information is not relevant, a firm will prohibit recommendations.65 The rule, and this guidance, thereby leave little room for a member or associated person to provide anything but “personalized investment advice” — and could result in the IAC’s proposed safe harbor, or one like it, being illusory.66
The IAC’s apparent failure to recognize this contradiction may be a result of the committee’s composition. In a letter to the SEC commenting on a draft of the IAC recommendations, SIFMA stated that many of the recommendations were in accord with SIFMA’s views, but that there remained places where “the Recommendations are incongruous with the intent of the requirements of § 913; incongruous with preserving the broker-dealer business model; and incongruous with an intent to maintain forward progress under § 913.”67 SIFMA noted that “[t]hese incongruities may be attributable to the fact that the Subcommittee (and indeed, the Committee) does not have a single broker-dealer representative.”68
While the IAC’s recommendations may inform the ongoing dialogue and the SEC’s ultimate rulemaking, the SEC has signaled through its 2014 regulatory agenda that any proposed rules are unlikely to come in the near future. When they do come, they will need to go through the requisite comment period, prior to the adoption of any final rule. Thus, three years after adoption of the Dodd-Frank Act, a uniform fiduciary duty standard hardly seems imminent.
1 Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty (“Recommendations”) (Nov. 2013), available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf ; Webcast, Investor Advisory Committee Meeting (Nov. 22, 2013) (discussing same), available at https://www.sec.gov/news/otherwebcasts/2013/iac112213.shtml.
2 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L. 111-203, H.R. 4173 at Title 9, § 913 (2010), available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.
3 Recommendations, supra note 1, at 7.
4 Id. at 6.
5 The Dodd-Frank Act, supra note 2 at § 913(b)-(c).
6 Id. at § 913(d)-(e).
7 Id. at § 913(c)(1)-(14).
8 Id. at § 913(c)(10).
9 Id. at § 913(c)(9).
10 Id. at § 913(f)-(g).
11 Id. at § 913(g).
12 Suitability, Regulatory Notice 12-25, 1 (May 18, 2012), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice
13 See FINRA Rule 2111, Supplementary Material 2111.05, available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859.
14 De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1303 (2d Cir. 2002). When a broker-dealer exercises discretion or control over client assets, it may owe its customer a fiduciary duty. E.g., C. Weiss, A Review of the Historic Foundations of Broker-Dealer Liability for Breach of Fiduciary Duty, 23 IOWA J. CORP. L. 65 (1997).
15 Id. at 1.
16 Id. Regulatory Notice 12-25, supra note 12, at 304.
17 Remarks by Richard Ketchum at the FINRA Annual Conference (May 21, 2012), available at http://www.finra.org/Newsroom/Speeches/Ketchum/P126481.
18 Report on Conflicts of Interest, 5 (Oct. 14, 2013), available at http://www.finra.org/web/groups/industry/@ip/@reg/@guide
/documents/industry/p359971.pdf. See also, Chairman and Chief Executive Officer Richard Ketchum, “A New Day in Regulation of the Financial Markets, speech at the Securities Industry and Financial Markets Association (“SIFMA”) Compliance &Legal Society New York Regional Seminar, 4 (Oct. 28, 2013), available at http://www.finra.org/newsroom/speeches/ketchum/p373689 (“As . . . noted in the report [on Conflicts of Interest],” it’s . . . important for firms to have articulated structures, policies and processes to identify and manage conflicts of interest. This includes adoption of a best interest of the customer standard in a firm’s code of conduct.”)
19 Mark Schoeff, Jr., Ketchum latest to urge brokers to embrace fiduciary duty, INVESTMENT NEWS, Nov. 12, 2013, available at http://www.investmentnews.com/article/20131112/FREE/131119969.
20 U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers at v-vi (Jan. 2011), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf.
21 Id. at viii-ix.
22 Request for data and other information, Exchange Act Release No. 34-69013 (Mar. 1, 2013), available at http://www.sec.gov/rules/other/2013/34-69013.pdf.
23 Id. at 1.
24 Mark Schoeff, Jr., Advisory panel calls on SEC to move fiduciary duty to front burner, INVESTMENT NEWS, Nov. 22, 2013, available at http://www.investmentnews.com/article/20131122/FREE/131129954.
25 See SEC Agenda Rule List - Fall 2013, available in two parts at http://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤t
Pub=true&agencyCode=&showStage=active&agencyCd=3235 and http://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤t
&Image58.x=11&Image58.y=9&Image58=Submit. Meanwhile, the Department of Labor’s Employee Benefits Security Administration (“DOL”) has simultaneously been working on a proposed amendment to a 1975 regulation that defines when a person providing investment advice with respect to a retirement account or plan becomes a fiduciary under the Employee Retirement Income Security Act (“ERISA”). The DOL has resisted suggestions, including from Congress, that it delay its rulemaking in deference to the SEC’s. The DOL points out that the SEC is not required to promulgate a fiduciary duty rule and is still performing its cost-benefit analysis to inform its decision whether to do so. The DOL proposed an amended fiduciary rule in 2010, but withdrew it in 2011 to allow more time for public input and research. The DOL stated at that time that it anticipated the revised proposed rule would “clarify[ ] that fiduciary advice is limited to individualized advice directed to specific parties” and “clarify[ ] the continued applicability of exemptions that have long been in existence that allow brokers to receive commissions in connection with mutual funds, stocks and insurance products.” See Press Release, U.S. Department of Labor, US Labor Department’s EBSA to re-propose rule on definition of a fiduciary, (Sept. 19, 2011), available at http://www.dol.gov/opa/media/press/ebsa/EBSA20111382.htm. Unlike the SEC, the DOL is required to submit its rule proposals for Office of Management and Budget (“OMB”) approval. OMB can comment on the cost-benefit analysis and request changes to a proposed rule.
26 Nick Paraskeva, SEC committee recommends fiduciary rules for broker dealers, COMPLIANCE COMPLETE, Dec. 2, 2013, available at http://www.complinet.com/global/news/news/article.html?ref=168510. Commissioner Aguilar has expressed his support for a uniform fiduciary standard; Commissioner Gallagher has expressed some reservations. Commissioners White, Stein and Piwowar have not publicly stated their positions. See Commissioner Luis A. Aguilar, Statement by SEC Commissioner: Statement in Support of Extending a Fiduciary Duty to Broker-Dealers Who Provide Investment Advice (May 11, 2010), available at http://www.sec.gov/news/speech/2010/spch051110laa.htm; Commissioner Daniel M. Gallagher, Keynote Address at the National Society of Compliance Professionals National Meeting (Oct. 23, 2012), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171491556 (“As we review today’s landscape and consider whether and to what degree to harmonize the broker-dealer and investment adviser regulatory regimes, . . . we need to be cognizant not only of the very different histories of those regimes but also of the fact that we’re not the first to consider the issue. In striving to obtain the best outcome for investors, whether clients of broker-dealers, investment advisors, or both, we should bring to bear our historical experience and approach the subject with a certain regulatory humility that places our efforts in the context of eight decades of securities regulation.”)
27 Comments on Duties of Brokers, Dealers, and Investment Advisers, available at http://www.sec.gov/comments/4-606/4-606.shtml.
28 Letter from Susan B. Waters, Chief Executive Officer, National Association of Insurance and Financial Advisors, Aug. 30, 2010, at 11, available at http://www.sec.gov/comments/4-606/4606-3099.pdf (“Consumer confusion is not the same thing as consumer harm, and providing the consumer with easy to understand information describing the two different standards, through the use of appropriate disclosures, would effectively address any concerns regarding consumer confusion about the standard of care under which their registered representative is operating. We respectfully recommend, therefore, that the SEC not take any action that would amount to an attempt to cure a problem that has not been demonstrated to exist, and which could have the unintended effect of reducing the access of middle and lower income market investors to needed financial products, services, and advice.”)
29 Letter from Bob Rusbuldt, President and Chief Executive Officer, Independent Insurance Agents & Brokers of America, Inc. to Elizabeth M. Murphy, Secretary, SEC, Aug. 30, 2010, at 1, available at http://www.sec.gov/comments/4-606/4606-2598.pdf (“Many broker-dealers and registered representatives, including the main street businesses represented by IIABA, will simply cease their securities-related operations given the uncertainty associated with such an amorphous and subjective standard, higher compliance and insurance costs, and well-founded fears about increased liability exposure.”)
30 Letter from Scott R. Shewan, President, PIABA to Ms. Elizabeth M. Murphy, Secretary, SEC, Sept. 3, 2010 (“PIABA Letter”), at 5 available at http://www.sec.gov/comments/4-606/4606-2737.pdf. (“Because the services offered are so similar, customers should be afforded the same level of protection, regardless of whether they are dealing with a broker or an investment advisor. This may be done by either eliminating the broker exclusion contained within the IAA, or by adding language to the Securities Exchange Act of 1934 which mirrors that contained in the IAA. We believe the latter would alleviate any burden on brokers to additionally register as investment advisors. We would be supportive of any effort by the Commission to create high, uniform standards for investment professionals, regardless of the capacity in which they interact with customers.”)
31 Letter from A. Heath Abshure, President, NASAA, et al. to the Honorable Mary Jo White, Chairman, SEC, June 4, 2013, available at http://www.sec.gov/comments/4-606/4606-3063.pdf (“As organizations that share a strong interest in investor protection, we have long advocated for extension of the fiduciary duty under the Investment Advisers Act of 1940 . . . to all broker-dealers when they offer personalized investment advice to retail customers.”)
33 Id. at 2.
34 Letter from the Ira D. Hammerman, Senior Managing Director and General Counsel, SIFMA, to Elizabeth M. Murphy, Secretary, SEC, (July 5, 2013), at 4-5, available at http://www.sec.gov/comments/4-606/4606-3128.pdf.
35 Id. at 4.
36 Id. at 4-5.
37 Id. at 5.
38 Letter from Mark Menchel, Executive Vice President and General Counsel, Financial Industry Regulatory Authority to Elizabeth M. Murphy, Secretary, SEC, Aug. 25, 2010, at 2, available at http://www.sec.gov/comments/4-606/4606-1924.pdf (“FINRA strongly supports a uniform standard of care for broker-dealers and investment advisers when providing personalized investment advice to retail customers.”)
40 Letter from David T. Bellaire, Executive Vice President and General Counsel, Financial Services Institute to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, July 5, 2013, 23, available at http://www.sec.gov/comments/4-606/4606-3138.pdf (“[E]liminating the broker-dealer exemption from the Advisers Act would harm investors by reducing access to advice, limiting investor choice among service providers, and hampering investor protection efforts. As a result, this approach should be rejected in favor of a clearly stated new universal standard of care, plainly articulated conduct rules for Financial Advisors, effective customer disclosures, and balanced regulatory supervision.”)
41 Id. at 3-4.
42 The Dodd-Frank Act, supra note 2 at § 911.
44 The Dodd-Frank Act, supra note 2 at § 911.
45 Press Release, U.S. Securities and Exchange Commission, SEC Announces Members of New Investor Advisory Committee (Apr. 9, 2012), available at http://www.sec.gov/News/PressRelease
46 Posting of Luis A. Aguilar to http://blogs.law.harvard.edu/corpgov/2011/09/24/the-urgent-need-to-re%E2%80%91establish-the-investor-advisory-committee/ (Sept. 24, 2011, 8:55 a.m.).
47 See SEC website, Investor Advisory Committee page, available at http://www.sec.gov/spotlight/investor-advisory-committee-2012.shtml (listing Committee members).
48 Id. In addition to the Investor as Purchaser Subcommittee, the IAC has an Investor as Owner Subcommittee, an Investor Education Subcommittee, and a Market Structure Subcommittee. Id.
50 Recommendations, supra note 1 at 5.
51 Id. at 2.
52 Id. at 5.
53 Id. at 5, n. 8.
54 Id. at 5-6.
55 Id. at 6.
56 Id. at 7.
58 Id. at 2-3.
59 Id. at 9.
60 Id. at 10.
61 de Kwiatkowski, supra note 14, at 1307.
62 Another danger to the broker-dealer community may lie in how application of the fiduciary duty may continue to expand in the future. A flavor of just how far that could go is suggested by the opinion of the Massachusetts Secretary of the Commonwealth, speaking for his Securities Division, that mandatory pre-dispute arbitration agreements are inconsistent with investment advisers’ fiduciary duties to their clients, and urging the SEC to adopt rules banning the use of pre-dispute arbitration provisions in advisory contracts. See Letter from William F. Galvin, Secretary of the Commonwealth, Commonwealth of Massachusetts, to SEC Commissioners, Feb. 12, 2013 available at http://www.sec.state.ma.us/sct/sctarbitration/arbitration-letter.pdf. Likewise, PIABA’s comment letter on the uniform fiduciary standard suggested that the SEC create a federal private right of action for breach of fiduciary duty. PIABA Letter, supra note 30 at 6.
63 “A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.” Rule 2111(a), supra note 13.
64 Id. at 2111.04.
65 Suitability: FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With Its Suitability Rule, Regulatory Notice 13-31 (Sept. 25, 2013), available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice
66 If the SEC takes any cues from FINRA’s well-developed body of interpretive guidance on its new suitability rule, it may be that the specificity of the advice will be the determining factor in discerning what constitutes “personalized investment advice” and what does not. In Regulatory Notice 12-25, FINRA explained that whether a communication is a “recommendation” subject to the suitability rule is an objective inquiry and “the more individually tailored the communication is to a particular customer or customers about a specific security or investment strategy, the more likely the communication will be viewed as a recommendation.” Regulatory Notice 12-25, supra note 12 at 3. Likewise, FINRA Rule 2111.03 provides a safe harbor from the suitability rule for asset allocation models and educational materials. By its terms, for this safe harbor to apply, the allocation model or educational materials “cannot include recommendations of particular securities.” Rule 2111.03, supra note 13. As FINRA, “As an allocation recommendation becomes narrower or more specific, the recommendation gets closer to becoming a recommendation of particular securities and, thus, subject to the suitability rule, depending on a variety of factors (including the number of issuers that fall within the broker-dealer’s allocation recommendation).” Regulatory Notice 12-25, supra note 12 at 7. If the SEC follows this or a similar framework, the broker-dealer exception to the Advisers Act will indeed be significantly narrowed.
67 Letter from Kevin M. Carroll, Managing Director and Associate General Counsel, SIFMA, to Elizabeth M. Murphy, Secretary, SEC, Oct. 11, 2013 at 1, available at http://www.sifma.org/comment-letters/2013/sifma-submits-comments-to-the-sec-responding-to-recommendations-of-the-investor-as-purchaser-subcommittee-re--broker-dealer-fiduciary-duty.
SIFMA reiterated its view that a uniform fiduciary standard should be implemented pursuant to the Exchange Act, and expressed its strong agreement with the IAC’s alternative recommendation for such rulemaking and with the IAC’s second recommendation for rulemaking requiring new, plain English disclosures. Id. at 2. It also criticized the recommendations for precluding broker-dealers from relying on the Broker-Dealer Exclusion under the Advisers Act, arguing that could foreclose broker-dealers from the retirement and investment planning businesses. Id. at 3.
68 Id. This is a bit of an overstatement. IAC member Steven Wallman is the CEO of Foliofn, Inc., a broker-dealer. Other IAC members are from firms that own or are otherwise affiliated with broker-dealers. It would have been more accurate for SIFMA to state that there are no representatives of full service retail broker-dealers on the IAC. This is not surprising given the constituency the IAC is supposed to represent.
69 The Investor Advocate position was created by Section 15 of the Dodd-Frank Act.
This article was originally published by Bingham McCutchen LLP.