Tag Archives: sec study

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.

SEC Study on Enhancing IA Examinations

Recommendations for Enhancing IA Exams

Under Section 914 of the Dodd-Frank Act, the SEC was required to conduct a study with respect to the need for enhanced examination and enforcement resources for investment advisers.  SEC staff recently released the study which is designed to provide Congress with recommendations with respect to the findings of the study.  In general, the study found that the SEC is not currently properly equipped to appropriately handle IA examinations because of capacity issues.  The study presents a number of statistics which show that IA registrations have greatly increased while the funding for the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has been subject to cutbacks in staff.

To strengthen the IA examination process, the SEC staff recommended that Congress take one of three different courses of action:

  1. Impose user fees on SEC-registered investment advisers
  2. Authorize one or more SROs to examine SEC-registered investment advisers
  3. Authorize FINRA to examine dual registrants (firms registered as both IAs and BDs)

SEC Recommendations

The Study provides three different options that Congress should consider with respect to the issue of instituting the most appropriate infrastructure for IA examinations.  These options and some of the positive and negative implications are discussed below.

1.  User Fees

Congress could authorize the SEC to implement user fees for registration.  These fees would go directly to the OCIE and pay for the IA examination program.

Discussion items:

  • would provide scalable resources (i.e. resources would increase or decrease in proportion to the number of registered investment advisor firms) – these resources would not be subject to the Congressional appropriations process
  • may be less expensive than instituting a new SRO regime and would utilize the existing OCIE staff expertise and knowledge
  • avoid all of the issues which would exist with establishing an SRO structure (inefficiencies, authority, membership, governance, and funding issues)
  • supported by some parts of the IA industry

2.  Delegation to SRO or SROs

Congress could authorize the SEC to delegate examination responsibilities to FINRA or another self regulatory organization(s).

Below are some of the points both for and against delegation to an SRO or multiple SROs:

  • scalable resources (i.e. funded by membership fees)
  • additional rulemaking – IA firms would be subject to laws (Investment Advisers Act of 1940), regulations (SEC Rules) and member (SRO) rules
  • SEC would need to oversee the SRO and subject the SRO to periodic audit/examination
  • an SRO would provide for more examination of IAs – for example, FINRA and NFA have examined more BDs and CPOs/CTAs than the SEC has examined IAs
  • many logistical issues involved with instituting any SRO and/or allowing FINRA to take over these responsibilities
  • multiple SROs (for different types of IAs) would likely create even more logistical issues
  • unclear how the SRO structure would work with state registered IAs
  • potential conflict of interest if the SRO (FINRA) was the same for the buy side and the sell side

3.  Authorize FINRA to examine dual IA-BD registrants

Congress could expand FINRA’s jurisdiction to oversee those firms which are registered as both an IA and as a BD.

  • only marginally helpful – only 5% of IAs are also registerd as BDs and many of these firms are the largest broker-dealer firms
  • gets rid of inefficiency by having two examinations – one from FINRA on the BD side and one from the OCIE on the IA side
  • risk of different interpretation of provisions of the Investment Advisers Act


This study simply states the obvious – the SEC does not have the resources it needs to adequately do its job.  It seems like the major conclusion has already been reached – IA firms are going to need to pay for their oversight because Congress will not pay for it.  The only question is whether managers will be making payments to the SEC (first option) or to FINRA or other SRO(s) (second two options).  Whatever Congress ultimately decides, it is likely that managers will be facing more fees in the future.

The full text can be found here: Study on Enhancing Investment Adviser Examinations


Bart Mallon is an attorney focused on the investment management industry and provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.