STANDARDS FOR BROKER-DEALER ADVICE TO INVESTORS



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.

  • SEC Issues Study on Regulatory Obligations of Financial Intermediaries
    In January 2011, the SEC released its study on the standards of care for investment advisers and broker-dealers providing personalized investment advice and making recommendations about securities to retail investors. It is now expected that the SEC will begin a rulemaking on this issue sometime in the near future.
  • SEC Comment Letter File on Study Evaluating Standards of Care for Financial Intermediaries
    The SEC has established a comment letter file on its study to evaluate the effectiveness of existing legal and regulatory standards of care for broker-dealers and investment advisers, when providing personalized investment advice and making recommendations about securities to retail investors. Click on the link to review the comment letters on this study.
  • SEC Requests Public Comment on Study to Evaluate Regulatory Standards of Care for Financial Intermediaries
    On July 27, 2010, the SEC requested public comment on a study it is required to undertake as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under section 913 of the Act, the SEC is required to conduct a study regarding the effectiveness of existing legal and regulatory standards of care for broker-dealers and investment advisers, when providing personalized investment advice and making recommendations about securities to retail investors.
  • SEC Issues Proposed Interpretive Rule on Broker-Dealer Advice to Investors
    On September 24, 2007, the SEC issued an interpretive rule that would address the application of certain activities of broker-dealers. The proposal would reinstate three interpretive provisions of a rule that was vacated by a recent court opinion in Financial Planning Association v. SEC. The first provision clarifies that a broker-dealer exercising investment discretion with respect to an account (or charging a separate fee) for advisory services provides investment advice that is not "solely incidental" to its business as a broker-dealer. The second provision clarifies that a broker-dealer does not receive "special compensation" under the Investment Advisers Act solely because it charges a commission for discount brokerage services that is less than it charges for full-service brokerage. The third provision clarifies that a registered broker-dealer is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subjects it to the Investment Advisers Act.
  • U.S. Court of Appeals Vacates SEC Broker-Dealer Exemption Rule
    On March 30, 2007, the U.S. Court of Appeals for the D.C. Circuit vacated the SEC final rule exempting broker-dealers from the Investment Advisers Act when they receive "special compensation." The Court held that the SEC exceeded its authority when it issued a final rule that expanded this broker-dealer exemption, relying on an interpretation that was inconsistent with the plain language of the statute.
  • SEC Extends Compliance Date for Broker-Dealer Advice Rule
    On September 12, 2005, the SEC issued a notice extending the compliance deadline for certain provisions of its broker-dealer advice rule to January 31, 2006.
  • SEC Issues Final Rule on Broker-Dealer Advice to Investors
    On April 12, 2005, the SEC issued a final rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering certain types of brokerage programs. Under the final rule, a broker-dealer providing advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act if it charges an asset-based or fixed fee (rather than a commission, mark-up, or mark-down) for its services, provided it makes certain disclosures about the nature of its services. The rule states that exercising investment discretion is not “solely incidental to” the business of a broker or a dealer within the meaning of the Advisers Act or to brokerage services within the meaning of the rule. The rule also states that a broker or dealer providing investment advice that is not solely incidental to the conduct of its business as a broker or a dealer or to its brokerage services if the broker or the dealer charges a separate fee or separately contracts for advisory services.
  • SEC Issues Proposed Rule on Broker-Dealer Advice to Investors
    On January 6, 2005, the SEC issued a proposed rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering advice to investors within certain brokerage programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act regardless of whether it charges an asset-based or fixed fee (instead of commissions, mark-ups, or mark-downs) for its services. The proposed rule also states that exercising investment discretion is not solely incidental to the brokerage business, and thus, a broker-dealer providing discretionary advice would be deemed to be an investment adviser under the Investment Advisers Act.
  • SEC Issues Temporary Rule on Broker-Dealer Advice to Investors
    On January 6, 2005, the SEC issued a temporary rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering certain types of brokerage programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act regardless of whether it charges an asset-based or fixed fee (rather than commissions, mark-ups, or mark-downs) for its services.
  • SEC Re-Opens Comment Period on Broker-Dealer Advice Rule
    On August 18, 2004, the SEC re-opened its period for public comment on a rule proposed in 1999 that would address the application of the Investment Advisers Act of 1940 to broker-dealers offering full service brokerage services (including advice) for an asset-based fee instead of traditional commissions, mark-ups, and mark-downs.

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.

Document Title: 
SEC Issues Study on Regulatory Obligations of Financial Intermediaries
Document Desc: 
In January 2011, the SEC released its study on the standards of care for investment advisers and broker-dealers providing personalized investment advice and making recommendations about securities to retail investors. It is now expected that the SEC will begin a rulemaking on this issue sometime in the near future.
Document Title: 
SEC Comment Letter File on Study Evaluating Standards of Care for Financial Intermediaries
Document Desc: 
The SEC has established a comment letter file on its study to evaluate the effectiveness of existing legal and regulatory standards of care for broker-dealers and investment advisers, when providing personalized investment advice and making recommendations about securities to retail investors. Click on the link to review the comment letters on this study.
Document Title: 
SEC Requests Public Comment on Study to Evaluate Regulatory Standards of Care for Financial Intermediaries
Document Desc: 
On July 27, 2010, the SEC requested public comment on a study it is required to undertake as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Under section 913 of the Act, the SEC is required to conduct a study regarding the effectiveness of existing legal and regulatory standards of care for broker-dealers and investment advisers, when providing personalized investment advice and making recommendations about securities to retail investors.
Document Title: 
SEC Issues Proposed Interpretive Rule on Broker-Dealer Advice to Investors
Document Desc: 
On September 24, 2007, the SEC issued an interpretive rule that would address the application of certain activities of broker-dealers. The proposal would reinstate three interpretive provisions of a rule that was vacated by a recent court opinion in Financial Planning Association v. SEC. The first provision clarifies that a broker-dealer exercising investment discretion with respect to an account (or charging a separate fee) for advisory services provides investment advice that is not "solely incidental" to its business as a broker-dealer. The second provision clarifies that a broker-dealer does not receive "special compensation" under the Investment Advisers Act solely because it charges a commission for discount brokerage services that is less than it charges for full-service brokerage. The third provision clarifies that a registered broker-dealer is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subjects it to the Investment Advisers Act.
Document Title: 
U.S. Court of Appeals Vacates SEC Broker-Dealer Exemption Rule
Document Desc: 
On March 30, 2007, the U.S. Court of Appeals for the D.C. Circuit vacated the SEC final rule exempting broker-dealers from the Investment Advisers Act when they receive "special compensation." The Court held that the SEC exceeded its authority when it issued a final rule that expanded this broker-dealer exemption, relying on an interpretation that was inconsistent with the plain language of the statute.
Document Title: 
SEC Extends Compliance Date for Broker-Dealer Advice Rule
Document Desc: 
On September 12, 2005, the SEC issued a notice extending the compliance deadline for certain provisions of its broker-dealer advice rule to January 31, 2006.
Document Title: 
SEC Issues Final Rule on Broker-Dealer Advice to Investors
Document Desc: 
On April 12, 2005, the SEC issued a final rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering certain types of brokerage programs. Under the final rule, a broker-dealer providing advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act if it charges an asset-based or fixed fee (rather than a commission, mark-up, or mark-down) for its services, provided it makes certain disclosures about the nature of its services. The rule states that exercising investment discretion is not “solely incidental to” the business of a broker or a dealer within the meaning of the Advisers Act or to brokerage services within the meaning of the rule. The rule also states that a broker or dealer providing investment advice that is not solely incidental to the conduct of its business as a broker or a dealer or to its brokerage services if the broker or the dealer charges a separate fee or separately contracts for advisory services.
Document Title: 
SEC Issues Proposed Rule on Broker-Dealer Advice to Investors
Document Desc: 
On January 6, 2005, the SEC issued a proposed rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering advice to investors within certain brokerage programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act regardless of whether it charges an asset-based or fixed fee (instead of commissions, mark-ups, or mark-downs) for its services. The proposed rule also states that exercising investment discretion is not solely incidental to the brokerage business, and thus, a broker-dealer providing discretionary advice would be deemed to be an investment adviser under the Investment Advisers Act.
Document Title: 
SEC Issues Temporary Rule on Broker-Dealer Advice to Investors
Document Desc: 
On January 6, 2005, the SEC issued a temporary rule addressing the application of the Investment Advisers Act of 1940 to broker-dealers offering certain types of brokerage programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Investment Advisers Act regardless of whether it charges an asset-based or fixed fee (rather than commissions, mark-ups, or mark-downs) for its services.
Document Title: 
SEC Re-Opens Comment Period on Broker-Dealer Advice Rule
Document Desc: 
On August 18, 2004, the SEC re-opened its period for public comment on a rule proposed in 1999 that would address the application of the Investment Advisers Act of 1940 to broker-dealers offering full service brokerage services (including advice) for an asset-based fee instead of traditional commissions, mark-ups, and mark-downs.