The SEC will not implement a uniform fiduciary standard for retail investment advice in Spring of 2011, contrary to the recommendations of the Commission’s staff.  The SEC’s staff recommended adoption of a uniform standard in its Study on Investment Advisers and Broker-Dealers, submitted to Congress on January 21, 2011, but resistance from SEC Commissioners Kathleen Casey and Troy Paredes was heard loud and clear by members of the U.S. House and Senate.

Currently, broker-dealers and investment advisers are subject to different standards of care under federal law when providing investment advice about securities.  Investment advisers are regulated under the Investment Advisers Act of 1940 as fiduciaries who have a duty to serve the best interests of their clients, including an obligation not to subordinate clients’ interests to their own.  Broker-dealers, however, are regulated under the Securities Act of 1933 and the Securities Exchange Act of 1934, specific Exchange Act Rules, and FINRA Rules, among others.  Generally, broker-dealers are not subject to a statutory fiduciary duty, but rather a standard requiring suitability, fairness and transparency.

The Study’s Findings and Recommendations

Uniform Fiduciary Standard – adoption of a standard of care “no less stringent than currently applied to investment advisers under [the] Advisers Act.”

Harmonization of Regulation – SEC to engage in rulemaking to develop a more consistent regulatory regime.

The Opposition

Commissioners Casey and Paredes, in opposition to the Study, stated that it “does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the Study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection.”  In three separate letters to the SEC, members of the U.S. House and Senate have urged the SEC to conduct a cost-benefit analysis of what changing the standard for broker-dealers will mean for investors.

As a result, it is unclear whether any new rules will ultimately result from the SEC’s Study.  However, we can be certain that they will not go into effect until late 2011, at the earliest.  At a recent Investment Company Institute (ICI) conference, a senior advisor to SEC Chairman Mary Schapiro and coordinator of the fiduciary study, Jennifer McHugh, said that SEC action will “likely occur later in the year.”  She added that the Commission had not formed a “rulemaking team” and continues to meet with outsiders “to get their reaction, rather than [move] straight to rulemaking.” 

Allison D. Charney contributed to this post.