Section 913 of the Dodd-Frank Act requires the SEC to deliver a study on the standards of care applicable to broker-dealers and investment advisers and to evaluate whether there are gaps or shortcomings to the existing legal and regulatory standards. The SEC delivered its study on January 21, 2011 (as discussed in the January 25, 2011 Alert). Section 913 also amends Section 15 of the Securities Exchange Act of 1934 (the “1934 Act”) and Section 211 of the Investment Advisers Act of 1940 (the “Advisers Act”) to authorize the SEC to promulgate rules governing the duty of care for broker‑dealers that provide personalized investment advice to retail customers. The SEC staff is currently working on proposed rules relating to the standard of care for broker-dealers; the SEC website lists rules under Section 913 among those planned to be proposed or adopted between August and December 2011.
On May 31, 2011, Congressman Barney Frank, who introduced the Dodd-Frank Act in the House of Representatives and oversaw its passage as then Chairman of the House Committee on Financial Services, delivered a letter to Mary Schapiro, the SEC Chairman, regarding the SEC’s authority under the Dodd-Frank Act to impose a higher standard on broker-dealers that provide personalized investment advice to their customers. In his letter, Congressman Frank states that the language adopted in Section 913 “recognizes some of the differences between broker-dealers and investment advisors, particularly with respect to the receipt of commission income and the fact that many broker-dealers do not continually provide advice to their customers.” Significantly, the letter points out that the requirement (in new Section 211(g) of the Advisers Act added by the Dodd-Frank Act) that the new standard be “no less stringent than” the standard in Advisers Act Section 206(1) and (2) “was not intended to encourage the SEC to impose the [Advisers Act] standard on broker‑dealers, but to ensure that the new standard would not be a ‘watered down’ version of the investment advisor’s fiduciary standard.”
The approach to Section 211(g) described in Congressman Frank’s letter also suggests how the SEC might appropriately exercise its rulemaking power under sub‑paragraph (1) of Section 15(k) of the 1934 Act added by the Dodd-Frank Act. Unlike Section 211(g), Section 15(k) states that if the SEC establishes a new standard of conduct for broker-dealers when providing personalized investment advice about securities to a retail customer, “the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser under section 211” of the Advisers Act. Congressman Frank’s letter endorses a thoughtful approach, rather than mere application of the Advisers Act standard, in setting a standard of care for broker‑dealers that provide personalized investment advice to retail customers, and Congressman Frank encourages the SEC to continue with the deliberate approach he believes the staff is taking.