In the first of what promises to be over 80 rulemakings and studies mandated by the recently enacted Dodd-Frank Act, on July 27 the SEC published a request for comment on issues that Section 913 of the Act mandates be studied, regarding the standard of care applied by brokers, dealers and investment advisers when making recommendations to retail clients (the “Fiduciary Duty Study”).1 The SEC’s release simply lists the issues that Section 913 requires it to address without any further discussion, including:
- The effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers and associated individuals for providing personalized investment advice and recommendations to retail customers imposed by the SEC, SROs, and other federal and state legal or regulatory standards;
- Whether there are legal or regulatory gaps in legal or regulatory standards of care imposed on brokers, dealers, investment advisers and associated individuals for the protection of retail customers;
- Whether retail customers understand the differences in the standards of care applicable to brokers, dealers, investment advisers and associated individuals;
- Whether the differences are the source of confusion to retail customers;
- The regulatory, examination and enforcement resources devoted to the enforcement of the standards of care for brokers, dealers, investment advisers and associated individuals, including the effectiveness of the examinations, the frequency of the examinations and the length of time of the examinations;
- The substantive differences in the regulation of brokers, dealers, investment advisers and associated individuals;
- The existing legal and regulatory standards intended to protect retail customers;
- The specific instances in which regulation and oversight of investment advisers provide greater protection to retail customers than regulation and oversight of brokers and dealers, and such instances when the regulation and oversight of brokers and dealers provide greater protection than that of investment advisers;
- The potential impact of eliminating the broker and dealer exclusion from the definition of “investment adviser” under section 202(a)(11)(C) of the Advisers Act on retail customers, brokers and dealers;
- Potential benefits and harm to retail customers that could result from such a change, including any impact on personalized investment advice and recommendations and the availability of such advice and recommendations;
- The impact on the number of additional individuals and entities that would be subject to investment adviser registration requirements and the additional costs to such individuals and entities as a result of this increase;
- The impact on SEC and state resources to conduct examinations and enforce the standard of care and other requirements under the Investment Advisers Act;
- The varying levels of services provided by brokers, dealers, investment advisers and associated individuals, and the varying scope and terms of retail customer relationships with such persons and entities;
- The potential impact on retail customers that could result from changes in regulatory requirements or legal standards of care, including any impact on:
- Protection from fraud;
- Access to personalized investment advice and recommendations to retail customers; or
- The availability of such services;
- The potential additional costs and expenses to retail customers and the potential impact on the profitability of their investment decisions;
- The potential costs and expenses to brokers, dealers and investment advisers resulting from changes in regulatory requirements or legal standards; and
- Any other consideration that the SEC considers necessary and appropriate in determining whether to engage in rulemaking.2
The comment period for the Fiduciary Duty Study is quite short — 30 days — driven, no doubt, in part by the statutory requirement that the full study, and resulting report, be completed by six months from the date of enactment of the Dodd-Frank Act. Based on publication in the Federal Register, comments likely will have to be submitted to the SEC no later than Labor Day.
During the debate over the Dodd-Frank Act, SEC Chairman Mary Schapiro made it clear that she did not believe that an additional study was necessary on the fiduciary duty issue. We believe it is essentially a foregone conclusion that at the conclusion of the Fiduciary Duty Study, the SEC will propose that brokers, dealers and investment advisers all be subject to a uniform fiduciary standard of care when making recommendations of securities to retail clients. However, the scope of such a fiduciary duty and its application in different business models remain very much open issues, and we encourage clients to engage with the SEC staff on the various permutations of these issues sooner rather than later.
For additional information or assistance with analysis of Section 913, please contact:
Amy Natterson Kroll, Partner, Broker-Dealer Group
David C. Boch, Partner, Broker-Dealer Group
Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Financial Services Area
Edwin E. Smith, Partner, Financial Restructuring; Co-chair, Financial Services Area
Timothy P. Burke, Practice Group Leader, Broker-Dealer Group; Co-chair, Financial Services Area
1 The SEC’s release and summary can be found at http://www.sec.gov/news/press/2010/2010-134.htm.
2 For a broader summary of the Dodd-Frank Act, please see our client alert at /Media.aspx?MediaID=10963.