Written by Michael Wu
On January 21, 2011, the SEC released its study on the effectiveness of the standard of care required of broker-dealers and investment advisers that provide personalized investment advice regarding securities to retail customers (“Covered Broker-Dealers and Investment Advisers”). The study also considered the existence of regulatory gaps, shortcomings or overlaps that should be addressed by rulemaking. The study was prepared pursuant to Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The study recommends that the SEC establish a uniform fiduciary standard for Covered Broker-Dealers and Investment Advisers that is at least as stringent as the fiduciary standard under Sections 206(1) and (2) of the Investment Advisers Act of 1940, as amended. The SEC staff stated that under this standard, Covered Broker-Dealers and Investment Advisers must “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.”
To implement the uniform fiduciary standard, the study recommends that the SEC adopt rules to address the following:
- Disclosure Requirements. Rules should be adopted to address both the existing “umbrella” disclosures (e.g., ADV Part II) and specific disclosures provided by Covered Broker-Dealers and Investment Advisers when a transaction is executed.
- Principal Trading. Rules should be adopted to address how Covered Broker-Dealers can satisfy the uniform fiduciary standard when engaging in principal trading activities.
- Customer Recommendations. Rules should be adopted to address the duty of care obligations that Covered Broker-Dealers and Investment Advisers have in making recommendations to retail customers.
The study further recommends that the SEC harmonize other areas of broker-dealer and investment adviser regulation, such as regulations pertaining to advertising and communication, the use of finders and solicitors, supervision and regulatory reviews, licensing and registration of firms, licensing and registration of associated persons, and maintenance of books and records.
Based on the study, it appears likely that the SEC will adopt a uniform fiduciary standard in the near future. However, at this time, it is not clear how the standard would affect the manner in which Covered Broker-Dealers and Investment Advisers conduct their businesses.