SEC Report Leaves Unanswered Questions

The Securities and Exchange Commission’s (SEC) anticipated report, “Study on Investment Advisers and Broker-Dealers,” came out late Friday, and by Monday morning, predictions for the future of the industry were anyone’s guess.

As mandated by the Dodd-Frank Act, the Securities and Exchange Commission (SEC) staff wrote the report to work toward a solution that is “designed to increase investor protection and decrease investor confusion in the most practicable, least burdensome way for investors, broker/dealers (B/Ds), and investment advisers,” the report says.  It also expressly recommends a “uniform fiduciary standard, no less stringent that currently applied to investment advisers under [the] Advisers Act,” for both B/Ds and registered investment advisers (RIAs).   

Sallie Krawcheck, President, Global Wealth & Investment Management of Bank of America Merrill Lynch, was asked how the possible expansion of the fiduciary standard of care to broker/dealers would affect the industry, while she was participating in a webcast discussing a new BofA Merrill Lynch product.   

Krawcheck said the SEC report mostly called for rule-making to commence; so until those rules are issued and implemented, day-to-day changes for registered investment advisers (RIAs) and B/Ds cannot be predicted.  She also said that a “move to a fiduciary standard [for B/Ds] does not preclude things like principal trading,” and she hopes to see more disclosure requirements that need to be written in “plain English.”

“You should not require a client base to have a Ph.D. in regulatory science to figure it out,” said Krawcheck.

She pointed out that the conversation since the report was issued on Saturday has focused on changes that traditional B/Ds will face, but RIAs might be impacted as well.  She concluded by saying, “a good place to come out would be for broker/dealers to have the fiduciary standard defined, and RIAs to have increased supervision, and then each group will be held to the same high standard.”

Even though the report didn’t provide clear answers as to what these rules will entail, the report stated the following regarding compensation: “The receipt of commission-based compensation, or other standard compensation, for the sale of securities does not, in and of itself, violate the uniform fiduciary standard of conduct applied to a broker-dealer. Section 913 also provides that the uniform fiduciary standard does not necessarily require broker-dealers to have a continuing duty of care or loyalty to a retail customer after providing personalized investment advice.” 

The report, written by staff members of the SEC, called for the Commission to “engage in rule-making” in these areas: 

  • Standard of Conduct 
  • Implementing the Uniform Fiduciary Standard 
  • Duty of Loyalty 
  • Principal Trading 
  • Duty of Care 
  • Personalized Investment Advice About Securities  
  • Investor Education  
  • Harmonization of Regulation  

The full report can be seen here.  Last week, the SEC published another report mandated by the Dodd-Frank Act which discussed possible structural changes to the oversight of RIAs (see "SEC Publishes Report about RIA Oversight").