The SEC Broker/Investment Adviser Fiduciary Duty Study

Over the weekend, the SEC released its Study on Investment Advisers and Broker-Dealers. This is one of many studies required by the Dodd-Frank Act, in this case by section 913 of the Act.

The Staff recommends that the SEC adopt a uniform fiduciary standard for brokers, dealers, and investment advisers.  Under that standard, “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 . . . 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.”  That fiduciary duty, the staff suggests, should be “no less stringent” than the fiduciary duty advisers currently owe under Section 206 of the Advisers Act.

The study raises a number of issues.  An obvious one is when, exactly is a broker, dealer, or investment adviser “providing personalized investment advice.”  The Study indicates that rulemaking or interpretive guidance will be needed to answer this question.  But the SEC won’t be writing on a blank slate.  Under the Supreme Court’s decision in Lowe v. SEC, 472 U.S. 181 (1985), personalized investment advice is a component of the definition of “investment adviser" under the Investment Advisers Act.

Another issue is how precisely a dealer, which is by definition buying or selling for itself, can act without regard to the dealer’s financial interest.  When selling, for example, must the dealer sell at its cost?  Or would disclosure of the dealer’s interest suffice?  (The Study has a lot to say about disclosure of conflicts of interest.)

Commissioners Kathleen Casey and Troy Paredes, the two Republican appointees on the Commission, released a statement that essentially disclaims the Study:  “ . . . we oppose the Study's release to Congress as drafted. We do not believe the Study fulfills the statutory mandate of Section 913 of the Dodd-Frank Act to evaluate the ‘effectiveness of existing legal or regulatory standards of care’ applicable to broker-dealers and investment advisers.”  They also point out, as the Study’s own title page makes clear, that studies such as this one express the views “of the Staff of the Commission and not necessarily those of the Commission as a whole or of individual Commissioners.”

It will be interesting to see how long it takes the SEC to come out with proposed rules, which, I assume, is the inevitable result of this Study.  We can probably count on at least two votes against any uniform fiduciary duty rule.  Stay tuned.  In the meantime, the Study is well worth reading.

Steve Bradford