The road to 'broviser': Harmonization would mean more work for advisers

Jan 30, 2011 @ 12:01 am

By Mark Schoeff Jr.

In the wake of the recent SEC report that recommends a universal fiduciary standard for personalized retail investment advice, most attention has focused on the potential impact on broker-dealers.

The 208-page document, however, also could change practices for investment advisers.

In addition to promoting a common standard of client care, the Securities and Exchange Commission staff report urges commissioners to harmonize the regulation of advisers and broker-dealers.

And in some areas, the SEC staff suggests that the better approach can be found in the broker-dealer rules that are administered by the Financial Industry Regulatory Authority Inc.

As opposed to the largely principles-based regulation of advisers, broker-dealers face more regulatory examinations and have greater bookkeeping and reporting burdens than advisers do. Harmonization likely would mean more work for the advisers rather than less for the brokers.

For instance, Finra provides a set of rules that broker-dealers must follow when putting together advertising. Investment advisers must stay within broader guidelines, such as ensuring that communication is not fraudulent or misleading.

“The [SEC] staff believes that with the significant impact that advertising and other firm communications have on retail investors, at a minimum, it could be beneficial for investment advisers to designate employees [such as members of the firm's compliance department] to review and approve communications before they are distributed to the public,” the report states.

If advisers were to come under the more stringent broker-dealer rules, they might have to hire a new staff person, train an existing employee or rely on a compliance firm to follow the new rules of the advertising road, according to Terrance Reilly, who is of counsel at Montgomery McCracken Walker & Rhoads LLP.

“The Finra rules and procedures are formulaic,” Mr. Reilly said. “They're easy to apply.”

Another area where the report recommends reconciliation of regulatory approaches is in the use of third parties to drum up business.

A solicitor for a broker-dealer must register as a broker-dealer. One who works for an adviser doesn't have to meet a similar requirement.

The report recommends that the commissioners revise transparency regulations “to assure that retail customers better understand the conflicts associated with the solicitor's and finder's receipt of compensation for sending a retail customer to an adviser or broker-dealer.”

Solicitors for advisers may think twice about performing those tasks if they have to become registered advisers, according to Mr. Reilly.

They may not be “ready to crack a book and get a license,” he said. “They get test-shy.”

The biggest adjustment in this area may have to be made by advisers to hedge and private-equity funds, who have come under SEC jurisdiction thanks to Dodd-Frank.

“There's a huge segment of the industry that relies on [solicitors],” Mr. Reilly said. “It would be brand-new for them.”

The report notes that broker-dealers are subject to more-specific supervision requirements and more-thorough review prior to registration, while their associates must meet higher continuing-education and licensing requirements than adviser associates. Broker-dealers also must retain all “communications and agreements,” yet advisers have to keep only specific kinds of information on file.

The report suggests that the SEC reconcile each area in its rulemaking, though it acknowledges that its budget constraints create a challenge in doing so.

What kind of fiduciary duty and related harmonization would emerge is unclear because the report identifies concerns that commissioners must address, such as disclosure, but leaves crucial details up to them.

Furthermore, two commissioners, Kathleen Casey and Troy Paredes, issued a statement saying that the report fails to back up its conclusion that a universal fiduciary duty is necessary to protect investors, and lacks an analysis of the potential costs of such a regulation.

Blaine F. Aikin, chief executive of Fiduciary360 LP, is happy with the overall thrust of the fiduciary report, which he said “points us in the direction of a strong fiduciary standard.”

But the SEC still has a way to go to reach that destination, he said.

“The wild card here is that disagreement among commissioners,” Mr. Aikin said. “It's going to be some tough sledding.”

The objections of Ms. Casey and Mr. Paredes have given an opening to broker-dealer groups that contend that subjecting all investment advice to fiduciary requirements would force them to dump less profitable clients or adopt a fee-only business model.

“NAIFA is concerned that the potential additional costs and increased potential liability for applying a "one size fits all' fiduciary standard of care to the broker-dealer business model could result in middle- and lower-market investors having less access to the account services and investment advice that are currently being delivered by registered representatives of broker-dealers,” Terry Headley, president of the National Association of Insurance and Financial Advisors, said in a statement.

Many financial sector organizations, including NAIFA, said that they back a fiduciary standard in principle but are wary of misguided implementation. The Securities Industry and Financial Markets Association urged the SEC “to ensure that the broker-dealer role is not hindered.”

Congress may weigh in before the SEC proceeds with a rule, even though the commission can move ahead on its own.

But neither the fiduciary analysis nor a related report on strengthening adviser oversight has yet been scheduled for a House or Senate hearing. The latter study suggests policies that Congress would have to approve, such as establishing a self-regulatory organization for advisers.

“I have really not had a chance to sit down and digest them completely,” said Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.

E-mail Mark Schoeff Jr. at


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