On January 3, 2008, the U.S. Securities and Exchange Commission (“SEC”) posted the text of the RAND Corporation’s final report (the “Report”) on practices in the investment adviser and broker-dealer industries. After an “RFP” process, the SEC contracted with RAND in 2006 to research current industry practices and identify investor perspectives on their relationships with financial service providers.

According to the Report (which is 133 pages in length, without appendices), RAND: reviewed academic literature on the financial industry; analyzed data collected by the Investment Adviser Registration Depository (IARD), the investment adviser registration system, the Central Registration Depository (CRD), the broker-dealer registration system, and Financial and Operational Combined Uniform Single (FOCUS) Reports filed by broker-dealers; reviewed marketing and disclosure documents for a selected sample of firms; conducted interviews of interested parties; carried out a national household survey; and conducted six focus groups.

Significantly, the Report offers no recommendations. Rather, it seeks to provide factual information regarding current business practices of investment advisers and broker-dealers and investors’ understanding of the differences between, and the relationship among, investment advisers and broker-dealers. In this regard, the Report offers the following observations:

  • The industry is “heterogeneous, with firms taking many different forms and offering a multitude of services and products.”
  • The spectrum of firms includes a relatively small number of large firms at one end that provide a full range of services and conduct an “overwhelming proportion” of the investment advisory and brokerage businesses, and a great number of relatively small firms at the other end that provide a limited range of either investment advisory or brokerage services.
  • Investors generally fail to distinguish financial service providers along investment adviser and broker-dealer regulatory lines.
  • Many persons interviewed claimed that required written disclosures for investors are problematic, because they are not easily understandable or are not explained by the financial service provider. Many investors do not take the time to fully read or understand the disclosures.
  • Focus-group participants struggled to understand differing standards of care for investment advisers and broker-dealers and expressed doubt that the standards differ in practice. They also expressed uncertainty and confusion about fees for their investments.
  • Most survey respondents and focus-group participants indicated that they were happy with their own financial service provider.

SEC Chairman Christopher Cox has reported that the SEC staff is “studying the report and the potential regulatory implications of its findings.” It has been reported that Chairman Cox requested that the SEC Divisions of Trading and Markets and Investment Management develop a list of policy options in response to the Report within the next four months. Click here to view the SEC press release announcing the posting of the Report, as well as a link to the Report.