SEC Seeks Help in Assessing Standards of Conducts, Other Obligations.

[ by Howard Haykin ]

Let's talk 'Virtual Reality."  The story involves an opportunity for many of you to play out your fantasies - i.e., to regulate the financial industry.  All that's required is that you tell the SEC Commissioners just how they should regulate brokers and advisers.  Where applicable, provide empirical data.  

The SEC seeks your input on whether new rules are needed to address the standards of conduct and regulatory obligations of broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers.  The 4-month comment period ends around 7/1/13.

SEC Chairman Elisse Walter opened the discussion this way:  “Studies have shown that few investors realize that the standard of care they receive depends on the type of investment professional they use. And often investors do not know which type of financial professional they are relying on. This request for information will help us in our ongoing consideration of alternative standards of conduct for certain broker-dealers and investment advisers, as well as potential harmonization of other aspects of regulation in this area.”

What the SEC Is Looking For.  Specifically, the SEC would like data and other information from the public and interested parties about the benefits and costs of the current standards of conduct for broker-dealers and investment advisers when providing advice to retail customers, as well as alternative approaches to the standards of conduct.  While empirical and quantitative data top the request list, the SEC encourages all interested parties to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches and guidance.  Recognizing that retail investors are unlikely to have significant empirical and quantitative information, the Agency welcomes any information they would like to provide.

SEC Objectives.   Based upon what data and information is received, the SEC expects the submissions to better educate the staff before they begin considering alternative standards of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers.  The SEC also plans on using this information to gain further insights for considering potential harmonization of certain other aspects of the regulation of broker-dealers and investment advisers.

SEC Staff Contacts - Direct your questions, as follows:   Call (202) 551-6655 for ...  Asst. Director Jennifer Marietta-Westberg, or Financial Economist Matthew Kozora, in the Division of Risk, Strategy and Financial Innovation.  
Call (202) 551-5550 (Trading & Markets),  or (202) 551-6825 (Chief Counsel), or 202-551-6787 (IA Regulation) for ...  Chief Counsel David Blass, Asst Chief Counsel Lourdes Gonzalez, in Sales Practices;  Sr, Special Counsel Emily Westerberg Russell, Branch Chief Daniel Fisher, Special Counsel Leila Bham.

Background That You've Heard Before - So We'll Be Brief.   Today, broker-dealers ("BDs") and investment advisers ("IAs") routinely provide to retail customers many of the same services, and engage in many similar activities related to providing personalized investment advice about securities to retail customers. Yet, BDs and IAs are subject to separate and distinct regulatory schemes that approach oversight differently. 

• IAs - fiduciaries to their clients - are largely governed by principles-based regulations. 
• BDs - not considered fiduciaries to its customers - are subject to comprehensive regulation under the Securities Exchange Act of 1934, as well as rules of each SRO to which they belong.
• IAs and BDs alike are subject to applicable antifraud provisions and rules under the federal securities
   

As mandated by provisions of the Dodd-Frank Reform Act, the SEC staff conducted a study and made recommendations they believe would enhance retail customer protections and decrease retail customers’ confusion about the standard of conduct owed to them when their financial professional provides them personalized investment advice.  The staff made two primary recommendations

• the SEC should engage in rulemaking to implement a uniform fiduciary standard of conduct for BDs and IAs when providing personalized investment advice about securities to retail customers. 
• the SEC should consider harmonizing certain regulatory requirements of BDs and IAs where such harmonization appears likely to enhance meaningful investor protection, taking into account the best elements of each regime.

Overview of the Request for Additional Data and Other Information.   The SEC requests public input to assist the staff in evaluating whether and how to address certain of the standards of conduct for, and regulatory obligations of, broker-dealers and investment advisers.

Data and other information from market intermediaries and others about the potential economic impact of the staff’s recommendations, including information about the potential impact on competition, capital formation, and efficiency, may particularly help inform any action we may or may not take in this area. We also especially welcome the input of retail customers.

We are specifically requesting quantitative and qualitative data and other information and economic analysis (herein “data and other information”) about the benefits and costs of the current standards of conduct of broker-dealers and investment advisers when providing advice to retail customers, as well as alternative approaches to the standards of conduct, including a uniform fiduciary standard of conduct applicable to all investment advisers and broker-dealers when providing personalized investment advice to retail customers. We recognize that retail customers are unlikely to have significant empirical and quantitative information. We welcome any information they can provide.

Proposed Uniform Fiduciary Standard of Conduct and Alternatives to that Standard.  In this release, the SEC discusses a potential uniform fiduciary standard of conduct and alternatives to that standard of conduct.  The SEC believes that consideration of a "uniform fiduciary standard of conduct" would benefit from a set of assumptions and other parameters that commenters can use and critique in order to generate meaningful data and other information.  Identification of particular assumptions or parameters, however, does not suggest our policy view or the ultimate direction of any action proposed by us.

The also seeks comment in this release on whether - or to what extent - the Agency should consider making other adjustments to the regulatory obligations of BDs and IAs, including regulatory harmonization.  Among other considerations, there are a variety of options relating to whether and how to act with respect to a potential uniform fiduciary standard of conduct or potential regulatory harmonization, including taking no action, taking action to implement one (either partially or wholly) and not the other, or taking action to implement both (again, either partially or wholly).  In order to inform our consideration of all of these options, this release discusses both a potential uniform fiduciary standard of conduct and regulatory harmonization and encourages comment on the potential practical, regulatory, and economic effects that action or inaction with respect to one or both may have.

We request data and other information relating to the provision of personalized investment advice about securities to retail customers to better understand the relationship between standards of conduct and the experiences of retail customers. In particular, we seek data and other information regarding:

• (a) investor returns generated under the existing regulatory regimes;
• (b) security selections of broker-dealers and investment advisers as a function of their respective regulatory regimes;
• (c) characteristics of investors who invest on the basis of advice from broker-dealers, invest on the basis of advice from an investment adviser, or invest utilizing both channels;
• (d) investor perceptions of the costs and benefits under each regime; and,
• (e) investors’ ability, and the associated cost to investors, to bring claims against their broker-dealer or investment adviser under their respective regulatory regimes.

We are also particularly interested in the activities, conflicts of interest and disclosure practices of IAs and BDs, as well as the economics of the investment advice industry and characteristics of the current marketplace.  We also are asking for data and other information about the benefits and costs of the current set of regulatory obligations that apply to BDs and IAs, and the benefits and costs of different approaches to harmonizing particular areas of BD and IA regulation.  

We now take out leave, and direct you to the SEC's releases.  Good Luck!

For further details, go to:  [SEC PR 13-32, 3/1/13] and [SEC Request for Information File No. 4-606,  3/1/13].