On January 21, 2011, the SEC staff submitted to Congress its study, as required by the Dodd-Frank Act, which evaluates the effectiveness of the existing standards of care for broker-dealers and investment advisers when providing personalized investment advice to retail customers. The study also examines the existence of any gaps or overlaps in the standards of care. The study recommends implementing a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice to retail customers.

Currently, broker-dealers and investment advisers are each regulated extensively, but under different regimes with differing standards. Despite the differing standards, broker-dealers and investment advisers provide many of the same services, including providing personalized investment advice to retail investors. The SEC staff’s study found evidence that retail investors generally do not understand the difference between investment advisers and broker-dealers or the standards of care applicable to each. The study noted that many retail investors expect any investment advice they receive to be in their best interest.

In order to decrease investor confusion and increase investor protection, the SEC staff recommends that the SEC adopt a rule, with appropriate interpretive guidance, to establish a uniform fiduciary standard to regulate all investment advisers and broker-dealers when providing personalized investment advice to retail investors, which should be no less stringent than the standard currently applied to investment advisers, i.e., “act in the best interest of the client.” The SEC staff noted that the SEC should provide guidance regarding how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading.

The study also recommends that the SEC consider harmonizing other regulatory requirements in order to provide investors with similar protections when broker-dealers and investment advisers are performing the same or substantially similar functions, including regulatory requirements regarding:

  • content of advertising and other customer communications,
  • the use of and disclosure requirements of finders and solicitors,
  • supervisory requirements including examination and oversight,
  • licensing and registration of firms, including disclosure requirements of Form ADV and Form BD, and
  • books and records requirements.  

The SEC staff recommends that the SEC take into account the best elements of each regime when considering the harmonization of regulations.

Two SEC commissioners issued a separate statement to express their view that the study does not adequately document retail investors’ confusion regarding the differing standards and does not address the possibility that the recommended uniform fiduciary standard may not solve the confusion. The two SEC commissioners also expressed concern that the overall cost of the recommended regulatory actions is not appropriately considered by the study, but noted that with further research and analysis, they could ultimately support the recommendations of the study. Because the Dodd-Frank Act does not impose a deadline for rulemaking, the two SEC commissioners suggested further research and analysis.