SEC to tackle thorny topic: How much advice brokers can give without being an adviser

Language in the Investment Advisers Act of 1940 exempts brokers from registering as investment advisers — and being fiduciaries — if their advice is "solely incidental" to their work

May 28, 2019 @ 4:23 pm

By Mark Schoeff Jr.

When it votes on a final investment advice reform package next week, the Securities and Exchange Commission will revisit an explosive issue: The extent to which brokers can provide advice without having to register as investment advisers.

When the four SEC members meet June 5, they'll decide whether to approve Regulation Best Interest and the disclosure document known as Form CRS. A new item on the agenda is labeled "interpretation of 'solely incidental.'"

That indicates the SEC will tackle language in the Investment Advisers Act of 1940 that exempts brokers from registering as investment advisers — and being fiduciaries — if the advice they provide is "solely incidental" to their work as brokers and if they receive no special compensation for those services.

"The solely incidental issue is crucial," Michael Kitces, partner and director of planning research at Pinnacle Advisory Group, wrote in an email. "It's actually the central issue of reforming fiduciary regulation of advisers."

In 2005, the SEC proposed a rule that would permit brokers to offer fee-based accounts without having to register as advisers. The U.S. Court of Appeals for the D.C. Circuit vacated the rule in 2007, holding that the agency didn't have the authority to allow the exemption. As a result, brokers who put clients in fee-based accounts must be dually registered as investment advisers.

Mr. Kitces said the SEC should be careful not to define "solely incidental" too broadly this time around.

"This issue forms the crux of a potential lawsuit challenge to the SEC if they go too far," Mr. Kitces said. "Just as the SEC's fiduciary broker-dealer exemption was overturned back in 2007 when the SEC tried to expand existing fiduciary exemptions beyond what Congress wrote, an overly lax interpretation of the 'solely incidental' rule here creates a similar risk of legal challenge for the SEC."

Investor advocates argue the SEC allows brokers to hold out as advisers yet continue to be governed by the suitability rule rather than the fiduciary duty. The brokerage industry has resisted suggestions to remove the broker exemption from the Investment Advisers Act.

In pages 199 through 209 of the Reg BI proposal, there is a discussion of the "solely incidental" issue.

"We believe it is appropriate for the commission to again consider the scope of the broker-dealer exclusion with regard to a broker-dealers' exercise of investment discretion in light of both proposed Regulation Best Interest and the proposed Relationship Summary," the proposal states.

Ron Rhoades, assistant professor of finance and director of the financial planning program at Western Kentucky University, is concerned the SEC will give brokers wide latitude to give advice without being fiduciaries.

"I think they want to formalize the informal interpretation they've had for several years," Mr. Rhoades said. "Pretty much any advice is acceptable — any level of advice does not require registration as an investment adviser."

Joel Wattenbarger, partner at Ropes & Gray, said the SEC is poised to weigh in on questions such as whether brokers can still fall under the "solely incidental" language if they exercise investment discretion on a temporary or limited basis.

"These are areas where the industry would like some clarity," he said.

The June 5 agenda says the SEC will "consider whether to publish" its interpretation of "solely incidental." It doesn't appear the agency will take comments on it.

"It certainly suggests they're proceeding with a final interpretation without engaging in a proposal," Mr. Wattenbarger said.

SEC chairman Jay Clayton asserts Reg BI raises the broker standard above suitability. Under the proposal, brokers and investment advisers would continue to be regulated separately, with advisers adhering to a fiduciary duty.

0
Comments

What do you think?

View comments

Upcoming event

Sep 10

Conference

Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print