SEC Study on Uniform Fiduciary Duty for BDs

Recommendation for Uniform Fiduciary Duty

Under Section 913 of the Dodd-Frank Act, the SEC was required to condict a study of the effectiveness of the current legal and regulatory structure for broker-dealer firms and investment advisory firms with respect to the provision of personalized investment advice to retail customers and to comment on any gaps in the legal and regulatory structure.  Essentially Congress wants to know whether retail investors really understand the difference between BDs and IAs.  This issue has been one which many in the industry have strong opinions about, particularly from the investor side and the broker-dealer side.

The following is a brief overview of the SEC study which was recently released.

SEC Recommendations

In the study, the SEC spent considerable time providing a background and overview of the regulatory regimes of both investment advisers and broker-dealers.  The study also discussed retail investors and made many references to other studies which have been conducted on this and similar issues.  Ultimately, the SEC staff was trying to determine what standards should be in place with the understanding that retail investors may have limited understanding of the regulatory structure of IAs and BDs.

Overall, the SEC’s recommendations fall into two categories:

  • Uniform Fiduciary Standard – SEC staff recommended that the SEC should apply a uniform fiduciary duty with respect to both IAs and BDs when such firms provide personalized investment advice regarding securities to retail custodmers [note: the fiduciary standard does not apply to brokers when they are activng in the capcity of a broker with respect to a transaction.]
    • With respect to the uniform standard, the staff noted that the SEC should provide guidance in some form with respect to implementing this standard.  Such guidance should cover, at least, the following items: standards of conduct, duty of loyalth, principal trading, duty of care, personalized investment advice about securities, and investor education.
  • Harmonization of Regulations – in general the SEC staff believes that harmonization, when it adds meaningful investor protection, would be advantageous.  Specifically, the staff discussed the following issues which potentially should have substantially similar rules/regulations for both IAs and BDs:
    • Advertising and other communications
    • Use of finders and solicitors
    • Solicitation
    • Licensing and registration of firms
    • Licensing and continuing education for representatives of BD and IA firms
    • Books and records

[Because of the complexity of the issue, the above is only a gross overview.]

Our thoughts

It seems clear that if two firms are engaged in the exact same activity with respect to retail investors (providing personalized investment advice regarding securities), then such firms should be subject cialis super active to the same standards of care with respect to those activities.  However, it is also clear that implementing this change in regulatory framework will not be easy.Should be a bias toward harmonization when possible and practicle

What we found particularly interesting about the study  was the discussion about state registered investment advisers and the various rules they must adhere to – it seems funny that at the federal level we are trying to harmonize regulations, whereas the report makes clear that each states rules have completely different rules (see report starting at page 85).

Probably the most interesting thing is that the Staff recommended “that the Commission should consider requiring investment adviser representative to be subject to federal continuing education and licensing requirements.”  This means that the SEC  (or potentially a SRO) would be required to create and administer an exam (similar probably to the Series 65 exam for state registered investment adviser representatives) and continuing education (similar to the CE requirements for brokers).

The full report can be found here: Study on Investment Advisers and Broker Dealers.


Bart Mallon provides legal advice to both investment advisers and broker-dealers through Cole-Frieman & Mallon LLP, an investment management law firm.  He can be reached directly at 415-868-5345.

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