On January 21, 2011, the SEC delivered to Congress a study on investment advisers and broker-dealers required by Section 913 of the Dodd-Frank Act (the “Study”). The Study, available here, recommends that broker-dealers and investment advisers be subject to a uniform fiduciary standard of conduct in providing personalized investment advice about securities to retail investors, and that the standard be no less stringent than that currently applied to investment advisers. The Study, prepared by the SEC Staff, also notes other differences in the regulatory schemes applicable to investment advisers and broker-dealers, and recommends that the SEC consider whether to more broadly harmonize the regulatory schemes applicable to the two groups.
Harmonization. The changes recommended in the Study would have an increased regulatory impact not only on broker-dealers but also on investment advisers. The recommendations, in addition to the uniform fiduciary standard, include:
Adopting uniform standards on advertising and customer communications regarding similar services and harmonizing internal pre-use review requirements for marketing materials or requiring advisers to designate employees to review and approve marketing materials, as broker-dealers are currently required to do;
Imposing licensing, examination and continuing education standards on investment adviser representatives similar to those applicable to registered representatives of broker-dealers;
Modifying the books and records requirements for investment advisers, including by adding a general requirement to retain all communications and agreements related to an adviser’s “business as such,” consistent with the standard applicable to broker-dealers; and
Requiring broker-dealers to provide a document disclosing the terms of their relationships with other broker-dealers and investment advisers, including material conflicts of interest, akin to the new Form ADV Part 2A that advisers deliver at the time of providing investment advice.
Dissenting Commissioners. Two of the Commissioners, Kathleen Casey and Troy Paredes, issued a dissent from the Study (available here). They wrote that in their view, “the Study’s pervasive shortcoming is that it fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers providing personalized investment advice to retail investors.” They further stated that the Study’s recommendation of a new uniform fiduciary duty standard and harmonization of two disparate regulatory schemes was made without adequate articulation or substantiation of the problems that would be addressed by the regulation, or recognition of the risk that the recommendations could adversely impact investors. The two Commissioners acknowledged that the Staff had had only a short time to conduct its study, but expressed the hope that the SEC would conduct further studies before proposing regulations.
What Happens Next. Section 913 of the Dodd-Frank Act provides that the SEC “may” engage in rulemaking with respect to the fiduciary standard, but does not set a deadline for the adoption of regulations. The SEC has not formally invited comment on the Study. Any proposed rulemaking will include an opportunity for comment.