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(Updated) Groundbreaking SEC study would smash old regulatory system, creating fiduciary brokers and more regulated advisors

Controversy and conflict emerge as SIFMA, Schwab and others begin to react

Monday, January 24, 2011 – 3:16 PM by Elizabeth MacBride
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Bill Crager of Envestnet: "There was a lot of momentum toward the fiduciary standard. Now the implications find their way throughout the industry."

Brokers should act in the best interests of their clients and investment advisers should abide by a set of more specific and stringent rules than those they currently operate under, said the SEC staff in a report whose breadth and ambition suggest that the SEC is interested in completely reshaping the rules that govern the business of financial advice.

“This Study may be the most significant 'win’ for consumers of investment advisory services since the enactment of the Investment Advisers Act of 1940,” said Ron Rhoades, a long-time advocate of the fiduciary standard and RIABiz’s One-Man Think Tank columnist. (See his full response here: SEC’s courage likely to be tested.)

Mandated by Dodd-Frank financial reform and released Friday night to Congress, the Study on Investment Advisers and Brokers recommends that broker-dealers be forced to abide by the fiduciary standard contained in the Investment Advisers Act of 1940. It also goes on to outline a host of areas in which the Commission might issue new rules that require investment advisors to meet the same standards broker-dealers have long operated under, for instance, in meeting licensing requirements.

“There’s probably a little bit for everybody in it,” said David Tittsworth, executive director of the Investment Adviser Association. “I think it’s pretty balanced.”

Two commissioners cast doubt on their willingness to take part in a sweeping overhaul. Kathleen L. Casey and Troy A. Paredes issued a separate statement saying that the SEC staff had not researched enough the implications of merging the regulatory regimes. For instance, they said that someone should study whether the advisory or brokerage model produces better investment returns for clients.

By Monday morning, the battle lines were already being drawn as reactions from groups began to flow in. Advocates of the fiduciary standard were pleased with the report. Generally, advisory groups, proponents of the fiduciary standard, reacted favorably to the language in the study. They had feared that the SEC would opt to depart from the Advisers Act and embrace a watered-down fiduciary standard.

The Financial Planning Coalition “commended” the SEC. The Committee for the Fiduciary Standard said the study “provides an excellent foundation for rule-making, where the standard will be shaped.”

The Securities Industry and Financial Markets Association, which has been slowly moving toward embracing a fiduciary standard, seemed to cautiously endorse that part of the study: “Upon initial review we believe that the SEC has appropriately articulated a workable comprehensive approach for personalized investment advice for retail customers.”

The Charles Schwab Corp. says brokers and advisors should act in their clients’ best interest. But its statement in response to the study showed the company not eager to embrace a new regulatory regime:

“We believe that requiring better disclosure and application of the best interest standard can and should be accomplished while keeping RIAs and broker-dealers distinct under the existing statutory and regulatory frameworks. This distinction provides beneficial choice in terms of type of service and cost of service, which investors want. RIAs are very different from broker-dealers, often providing different types of service and expertise, and charging for those in a different way. We believe there is no need for broker-dealers to become investment advisers when giving transactional advice. Similarly, there is no need for investment advisers to take on broker-dealer rules or have their own self-regulatory organization, which would only increase costs and complexity for RIAs and their clients.”

Fidelity Investments said that it is “in discussions with our clients, legislators and regulators on the proposals regarding investor protection and fiduciary standards. We support a fiduciary standard of care with clear rules and where the core activity is personalized investment advice in a retail setting.”

The Big “I” which represents insurance agents and brokers and has strongly opposed extending the fiduciary standard, released the following:

“The Big 'I’ is disappointed with the SEC staff recommendation to apply a new, unnecessary fiduciary standard to broker-dealers as they already adhere to a rigorous and strictly-enforced suitability standard,” said Charles Symington, senior vice president of government affairs. “We believe the unwarranted application of this burdensome standard will only serve to lessen the number of qualified financial advisors serving middle-class Americans as many main street businesses currently offering this securities advice as part of broader service to consumers will simply cease these operations given the uncertainty associated with such an amorphous and subjective standard.”

Potential impact?

The study recommends such sweeping changes – basically, merging the rules that govern advisors and brokers — that it’s difficult to predict the impact of them on investment advisors.

“There was a lot of momentum toward the fiduciary standard,” said Bill Crager, president of Chicago-based TAMP Envestnet. The firm has $126 billion in total assets served and more than 860,000 investor accounts. “Now the implications find their way throughout the industry.”

Envestnet has built out its platform with compliance features to help advisors keep records of their fiduciary obligations. It, and other companies that have a strong standing in the fiduciary world, have the potential to benefit from a big shift by broker-dealer firms to a fiduciary model.

However, it’s also tricky to predict what might grow out of the study because it contains recommendations only. Each of the changes suggested in the study, issued Friday night to Congress, would need to be implemented through a rule-making. An SEC rule-making can take months or years and each would each be subject to a vote from the Commissioners.

Broker-dealers and the fiduciary standard

From a big-picture perspective, the most significant recommendation was that broker-dealers abide by the fiduciary standard. The study grounds that recommendation with references to the Investment Advisers Act of 1940.

Specifically, the Staff (of the SEC) recommends that the uniform fiduciary standard of conduct established by the Commission should provide that: the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to 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.

... The Staff is of the view that the existing guidance and precedent under the Advisers Act regarding fiduciary duty, as developed primarily through Commission interpretive pronouncements under the antifraud provisions of the Advisers Act, and through case law and numerous enforcement actions, will continue to apply.

There are signs however, that any subsequent rules might allow for wiggle room. A reference to disclosure suggests the either broker-dealers or advisors might be able to discharge their fiduciary obligations merely through disclosing whatever conflicts of interest they have to clients.

New rules for investment advisors

One of the biggest differences between investment advisors and broker-dealers is that the former have operated under a principles-based model of regulation. Broker-dealers have a rules-based approach. The SEC study makes clear that the Commission is considering applying rules to investment advisors.

Among the topics that the executive summary mentions as areas in which it might issue new rules applying to both broker-dealers and investment advisors which would be apt to change things more for the latter (these are quotes from the report):

  • The Commission should consider whether the disclosure requirements in Form ADV and Form BD should be harmonized where they address similar issues, so that regulators and retail investors have access to comparable information. The Commission also should consider whether investment advisers should be subject to a substantive review prior to registration.
  • The Commission could consider requiring investment adviser representatives to be subject to federal continuing education and licensing requirements.
  • The Commission should consider whether to modify the Advisers Act books and records requirements, including by adding a general requirement to retain all communications and agreements (including electronic information and communications and agreements) related to an adviser’s “business as such,” consistent with the standard applicable to broker-dealers.

Here are links to the SEC’s study on harmonizing regulations and the Commissioners’ statement.


The study on harmonizing regulations for broker-dealers and investment advisers is separate from the other study that made headlines last week – on whether investment advisors should be governed by an SRO. (See” SEC presses case for user fees in much-anticipated report to Congress). The SEC staff suggested that Congress consider three options: funding more exams through user fees; a new SRO; or that FINRA be given oversight of hybrid firms.

Both studies were mandated to be done within six months of the passage of Dodd-Frank financial reform, which is why the both came out last week. Separately, Dodd-Frank also mandated the GAO to look into whether financial planners should have an oversight board. (See: GAO study puts insurance agents up for scrutiny as it rejects idea of sweeping RIAs, b-ds, planners into one regulatory pool).

Elizabeth’s note: Sometimes, I love the 24-hour news cycle, which keeps the world informed. But in the case of an SEC study, I have to wonder whether it would have hurt anyone for the SEC to have kept it under wraps and undelivered to Congress until Monday morning. Thanks to those who made themselves available for interviews on a Saturday.

Something that may be of interest to Washington insiders: I found the SEC’s report actually posted on SIFMA’s web site before it was up on the SEC’s. SIFMA didn’t respond to a question about how that happened.

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Mentioned in this article:

Envestnet Inc
Top Executive: Jud Bergman

Jeff Spears

Jeff Spears

January 23, 2011 — 1:27 PM

Sure looks like the SEC got it right! While most of the pre-release coverage had focussed on the flaws in the B/D model the study recognizes that there are items that need to be improved in the RIA business model too.
I’ve worked in both business models and couldn’t agree more with the SEC study.

Stephen Winks

Stephen Winks

March 12, 2013 — 8:11 PM

Commissioners Casey and Paredes call for yet another study illustrates they have not been paying attention to the substance of the fiduciary debate. It has been long established and agreed by both advisor and brokerage interests that brokers are neither accountable nor have ongoing responsibilities for their recommendations. Thus by definition, brokers don’t know whether they add value or not by design, inorder to mitigate fiduciary liability. Broker/Dealers neither acknowledge nor support the fiduciary standing of their brokers. Thery do not even acknowledge their brokers render client specific advice which is a fiduciary act. None of the necessary enabling resources (prudent process, advanced technology, work flow management, more sophisticated approach to portfolio construction, conflict of interest management) are in place for it to even be possible for brokers to know whether they add vaslue or not.

What Casey and Paredes don’t understand is the level of counsel a broker can provide has been crippled by the insistence of brokerage interests who would like to perpetuate the industry stasis of 1940 before ERISA, Modern Portfolio Theory, the Internet and advances in investment analytics and portfolio construction were advanced. Today, modernity requires an unprecedented level of counsel which is easily is possible but thwarted by brokerage interests..The brokerage industry must evolve from selling investment products with no accountability or responsibility, to expertly addressing and managing investment and administrative values for each client as required by fiduciary standing and statute.


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