RIA Compliance Blog
One year ago, the Securities and Exchange Commission (SEC) staff recommended that a uniform fiduciary standard be applied to both broker-dealers and investment advisers. Recently, however, the SEC postponed a corresponding rule proposal for a second time.
In January, SEC Chairman Mary Schapiro sent a letter to Congressman Scott Garrett, Chairman of the House Capital Markets Subcommittee, stating that it needs to gather additional information for an economic analysis of the impact of a standard of care regulation. Although the SEC had previously set it for action in 2011, that time frame has now been changed to “date to be determined.” The SEC has already designated specific time frames for 51 other rules and reports required by the Dodd-Frank Act.
In the letter to Rep. Garrett, Chairman Schapiro wrote, “SEC staff are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. In this request, it is our hope commentators will provide information that will allow commission staff to continue to analyze the various components of the market for retail financial advice.”
The Dodd-Frank Act did not mandate that the SEC promulgate a rule creating a fiduciary standard for brokers, but rather it gave it the authority to create one after completing a study. Before implementing a rule, the SEC is required to conduct a thorough cost-benefit analysis to prevent future lawsuits. Last year, a court decision held that the cost-benefit analysis of a rule on proxy access was flawed, which resulted in the rule being vacated.
Even though the SEC has been slow to promulgate a rule relating to the standard of care for brokers, it does not mean that there will never be one. The Financial Industry Regulatory Authority (FINRA) has already taken steps toward requiring brokers to act as fiduciaries through Rule 4530, effective July 2011, and Rule 2090 which will take effect in July 2012.
FINRA Rule 4530 requires member firms to self report a number of categories of information, which may lead to representatives exercising greater care with their clients. The most stringent part of this rule requires member firms to report within 30 days after it has concluded or reasonably should have concluded that an associated person or the firm violated any securities, insurance, commodities, financial or investment related rule.
FINRA Rule 2090 mandates that every member use reasonable diligence when it opens and maintains accounts by knowing essential facts concerning every customer and the basis upon which recommendations may be made to customers. The facts essential to knowing the customer include those required to:
- Effectively service the account;
- Ensure compliance with any special handling instructions on the account;
- Understand the authority of each person acting on behalf of the customer; and
- Comply with the applicable rules.
Even though these FINRA rules do not actually create a fiduciary duty for broker-dealers or investment advisers, they show movement toward such a standard, which may ultimately come from the SEC.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.