Under current SEC rules, investment advisers and broker-dealers are subject to different standards of care when providing personalized investment advice and making recommendations about securities to individual investors.
Investment advisers are subject to the requirements of the Investment Advisers Act of 1940. Under this Act, an investment adviser is a fiduciary, with a duty to act in the best interests of its clients, including an obligation to place a client's interests ahead of its own interests. An investment adviser with a material conflict of interest must either eliminate that conflct or fully disclose to its clients all material facts relating to the conflict.
Broker-dealers, on the other hand, are not considered fiduciaries, and are subject to different Federal statutes and rules. Under the anti-fraud provisions of the Federal securities laws and the rules of the Financial Industry Regulatory Authority (FINRA), broker-dealers are required to deal fairly with their customers. An important aspect of a broker-dealer's duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the interests of its customer. Broker-dealers also are required under certain circumstances to disclose material conflicts of interest to their customers, in some cases at the time of the completion of the transaction.
In 2005, the SEC attempted to expand the current exemption in the Investment Advisers Act for broker-dealers providing investment advice that is "solely incidental' to their business and when receiving "special compensation." The U.S. Court of Appeals for the D.C. Circuit vacated this final SEC rule in 2007, leaving a great deal of uncertainty about when a broker-dealer is subject to the Investment Advisers Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the SEC to conduct a study regarding the effectiveness of the existing standards of care for broker-dealers and investment advisers. The SEC completed this study in January 2011 and is expected to initate a rulemaking on this topic in the near future.