To no one's surprise, the SEC — within a report mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act — recommended that regulations be implemented to create a uniform fiduciary standard for all providers of personalized investment advice to retail customers, whether such providers are registered as broker-dealers or investment advisers.
The report has not been endorsed by the SEC members and, at this point, merely reflects the views of the SEC staff. Indeed, it is likely that some of the SEC members will find such regulations unnecessary and possibly, if adopted, would constitute a hindrance rather than an aid in achieving greater investor protection. The study reported on was mandated by Section 913 of Dodd-Frank directing the SEC to study the effectiveness of the current standards applicable to broker-dealers and investment advisers and then make recommendations to address “gaps” in investor protection between the two registered groups. According to the SEC, out of the approximately 12,000 SEC registered investment advisers, approximately five percent also are registered broker-dealers and 22 percent of the 12,000 registrants have a related person registered as a broker-dealer.
The uniform fiduciary duty recommended by the SEC staff would require all brokers, dealers, and investment advisers that provide personalized investment advice about securities to “retail” customers to act in the best interest of the customer without regard to their own interests. The staff stated in its report that the uniform fiduciary standard should not be “less stringent” than the standard for investment advisers under the Investment Advisers Act of 1940. The SEC will need to further define the term “personalized advice” and identify the “retail” customers that will be afforded the fiduciary standard protections.
Considered by the staff, but not recommended in the study, was the repeal of the exclusion from the definition of an investment adviser under the Advisers Act for a broker or dealer providing investment advisory services but the performance of such services is incidental to its business as a broker or dealer and which receives no special compensation for such services. Some critics of the staff's study state that the SEC failed to make the case that such a standard is necessary for the protection of investors. Instead, such critics state it is conceivable that, if the adopted standard includes brokers and dealers, the net result could mean fewer and more expensive investment choices for retail investors. Interestingly, some within the broker-dealer industry appear to support the staff recommendation citing that the recommendation was a reasonable approach that should have a positive impact for retail customers.
Now that the SEC has concluded its study and reporting as mandated by Dodd-Frank, it will be up to Congress for possible next steps on whether a uniform fiduciary standard should be adopted.