Broker-Dealers Beware

When enacting Dodd-Frank, Congress sought guidance from regulatory agencies to help assess what it, in many instances, could not: The real impact of the reforms that it sought to implement. One such reform related to the provision of personal investment advice by financial institutions to retail customers. In particular, Section 913 of the Dodd-Frank Act directed the SEC to conduct a study to evaluate the effectiveness of the current legal and regulatory standards of care governing the provision of that advice, and to assess whether there are gaps, shortcomings or overlaps in the applicable standards. The report that was issued last week by the SEC staff raises critically important questions for all brokers, dealers and investment advisers - and, of course, for their in-house counsel.

The report advocated that the Commission implement a uniform fiduciary standard for all broker-dealers and investment advisers when they give individualized investment advice to retail customers: "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." The report also considered two alternatives: (i) the repeal of the broker-dealer exclusion to the definition of an "investment adviser," and (ii) the imposition of the requirements of the Investment Advisers Act on broker-dealers. Although the report concludes that it would not be proper to broadly impose the requirements of the Investment Advisers Act on broker-dealers, it does recommend that the Commission "harmonize" the rules that apply to both types of entities. In short, the report recommends sweeping changes to the current regulatory environment for broker-dealers.

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Matthew Ingber

Matthew Ingber is a litigation partner at Mayer Brown.

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