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SEC Study on Investment Advisers and Broker-Dealers

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  • Baker, John
    The Securities and Exchange Commission has released its much-anticipated staff study on the legal and regulatory standards of care for providing personalized
    Message 1 of 1 , Jan 23, 2011
      The Securities and Exchange Commission has released its much-anticipated staff study on the legal and regulatory standards of care for providing personalized investment advice and recommendations about securities to retail customers. Study on Investment Advisers and Broker-Dealers (Jan. 2011). As most observers expected, the study recommends a uniform fiduciary standard based upon the language of Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: "the standard of conduct for 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 be to 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."

      Section 913 of the Dodd-Frank Act authorizes the SEC to adopt rules to address the standards of care and provides that the SEC shall consider the findings, conclusions, and recommendations of the study. The SEC's online plan of implementation contemplates that it will propose rules in the April - July 2011 period. The study leaves open most of the details of implementation, but does note the following:

      * Duty of Loyalty: A uniform standard of conduct will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest. The Commission should prohibit certain conflicts and facilitate the provision of uniform, simple and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest.
      o The Commission should consider which disclosures might be provided most effectively (a) in a general relationship guide akin to the new Form ADV Part 2A that advisers deliver at the time of entry into the retail customer relationship, and (b) in more specific disclosures at the time of providing investment advice (e.g., about certain transactions that the Commission believes raise particular customer protection concerns).
      o The Commission also should consider the utility and feasibility of a summary relationship disclosure document containing key information on a firm's services, fees, and conflicts and the scope of its services (e.g., whether its advice and related duties are limited in time or are ongoing).
      o The Commission should consider whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements.
      * Principal Trading: The Commission should address through interpretive guidance and/or rulemaking how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading.
      * Duty of Care: The Commission should consider specifying uniform standards for the duty of care owed to retail investors, through rulemaking and/or interpretive guidance. Minimum baseline professionalism standards could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor.
      * Personalized Investment Advice About Securities: The Commission should engage in rulemaking and/or issue interpretive guidance to explain what it means to provide "personalized investment advice about securities."

      The study is sharply focused on retail investors, and there is only one passing reference in the study to the statutory authority to extend the uniform fiduciary standard to persons other than retail customers.

      The two Republican Commissioners, Kathleen Casey and Troy Paredes, issued a statement strongly critical of the study, which they opposed releasing to Congress as drafted. They argued that the study should be viewed as a starting point for further research and consideration, rather than as forming the primary basis for rulemaking.

      The SEC's press release, with links to the study and to the Commissioners' statement, is online at


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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