FEBRUARY 2011—Legislative Intelligence Update | SEC Staff’s Study on Investment Advisers and Broker–Dealers
Welcome to this edition of IMCA's Legislative Intelligence update. This month's update discusses the SEC's recently released Study on Investment Advisers and Broker-Dealers, which recommends rulemaking to establish a uniform fiduciary standard for investment advisers and broker–dealers.
The purpose of this update, prepared by Morgan Lewis, is to give members legislative and public affairs intelligence and analysis and is strictly informational and educational. IMCA, as an education and credentialing organization, does not lobby legislators or regulators nor advocate for any particular legislative or regulatory position either on its own or through its relationship with Morgan Lewis.
If, after reading this update, you have additional questions please contact IMCA using the "Questions? E-mail IMCA" button at the bottom of this e-mail. We will either respond personally to your inquiry or include a response in an upcoming issue.
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SEC Staff’s Study on Investment Advisers and Broker–Dealers
On Friday, January 21, the Securities and Exchange Commission (“SEC”) Staff released its long-awaited 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”).1 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.2
As discussed in the Study, the SEC Staff notes that retail investors generally are confused about the distinctions between investment advisers and broker–dealers and often view them as interchangeable investment professionals. Many at the SEC, therefore, believe that a uniform fiduciary standard not only will help to protect retail investors, but “match legal obligations with the expectations and needs of investors, who are often confused about the roles of investment advisers and broker–dealers.”3 The Study frames the issues for re-mapping the regulation of investment advisers and broker–dealers, which could have a dramatic affect on investment management consultants.
Summary of SEC Staff Recommendations
In addition to recommending the establishment of a uniform fiduciary standard, the SEC Staff recommends that the SEC undertake a number of actions, certain of which are outlined below, 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
The Staff recommends that the SEC engage in rulemaking and/or issue interpretive guidance clarifying the duty of loyalty and duty of care components of the uniform fiduciary standard. The Staff also recommends that the SEC consider specifying uniform standards for the duty of care owed to retail investors, through rulemaking and/or interpretive guidance.
Disclosure and Advertising
The Staff recommends that the SEC develop consistent and substantive customer communication rules to facilitate the provision of uniform, simple, and clear disclosures to retail investors about the terms of their relationships with broker–dealers and investment advisers and conflicts of interest. At a minimum, the Staff recommends that the SEC articulate consistent rules regarding the pre-review and approval of customer communications. To further the improvement of disclosure available to investors, the Staff also recommends that the SEC consider whether the Form ADV and Form BD disclosure requirements should be harmonized.
Principal Trading
The Staff recommends that the SEC address through interpretive guidance and/or rulemaking how broker–dealers should fulfill the uniform fiduciary standard when engaging in principal trading in light of the fact that they are not required to comply with principal trade provisions similar to those imposed on investment advisers and do not have a continuing duty of care or loyalty to a retail customer after providing investment advice.
Personalized Investment Advice
The Staff recommends that the SEC engage in rulemaking and/or interpretive guidance to explain what it means to provide “personalized investment advice about securities.” Here, the SEC Staff recommends 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
The Staff recommends that the SEC 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
The Staff recommends that the SEC 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
The Staff recommends that the SEC consider requiring investment adviser representatives to be subject to federal licensing and continuing education requirements. The Staff also recommends that the SEC consider whether to harmonize broker-dealer and investment adviser registration processes, including, notably, subjecting investment advisers to a substantive review prior to registration.
Books and Records
The Staff recommends that the SEC consider whether to modify the Advisers Act books and records requirements, specifically by requiring investment advisers to retain all communications and documentation relating to their business as an investment adviser similar to the requirements currently applicable to broker–dealers.
IMCA will release a whitepaper shortly analyzing the Study and its proposals—and their possible impacts on our members.
Endnotes
1 Section 913(b): “The Commission shall conduct a study to evaluate—(1) the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, persons associated with brokers or dealers, and persons associated with investment advisers for providing personalized investment advice and recommendations about securities to retail customers imposed by the Commission and a national securities association, and other Federal and State legal or regulatory standards; and (2) whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for brokers, dealers, investment advisers, persons associated with brokers or dealers, and persons associated with investment advisers for providing personalized investment advice about securities to retail customers that should be addressed by rule or statute.” The Study is available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf.
3 Commissioner Elisse B. Walter, “A Tale of Two Studies: Investment Management Institute Keynote Remarks” (February 10, 2011), available at http://www.sec.gov/news/speech/2011/spch021011ebw.htm.
