The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the U.S. Securities and Exchange Commission to conduct a study regarding the standard of care of brokers, dealers, and investment advisers. That process has already begun. The SEC has issued a request for comment in which it is seeking public input, comments, and data regarding the standard of care imposed or to be imposed upon these financial industry professionals. Comments are due by August 30, 2010.
Current law imposes a higher standard of care on investment advisers (i.e., a fiduciary duty) while imposing a lesser standard of care on brokers (i.e., a suitability standard). Regulators have long been concerned that retail customers do not understand the differences in these standards of care.
In announcing the SEC’s request for comments, Chairman Shapiro stated, “At the completion of this study, we will have the authority to write rules that would create a uniform standard of conduct for professionals who provide personalized investment advice to retail customers. And, the new law requires that this standard be ‘no less stringent’ than the standard applicable to investment advisers.” Therefore, this study is important because it likely will result in the SEC issuing new rules that will impose a greater standard of care on brokers and dealers.
In the study, the SEC will evaluate the effectiveness of the existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them for providing personalized investment advice and recommendations about securities to retail customers. The SEC will also evaluate whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers.
Specifically, the SEC requests comment on fourteen issues, including the following:
1. The effectiveness of the existing legal or regulatory standards of care for brokers, dealers, investment advisers, and associated persons.
2. Whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for brokers, dealers, investment advisers, and associated persons.
3. Whether retail customers understand that there are different standards of care applicable to brokers and investment advisers.
4. The regulatory, examination, and enforcement resources devoted to enforcement of the standards of care.
5. The potential impact on retail customers of imposing a higher standard of care on brokers, dealers, and their associated persons.
6. The varying level of services provided by brokers and investment advisers.
7. Potential additional costs and expenses to retail customers and to brokers, dealers, and investment advisers.
