As we blogged about last August, Section 913 of the Dodd-Frank Act directed the SEC to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. Recall that, traditionally, broker-dealers and investment advisors are subject to different duties of care: a suitability standard for broker-dealers and a more stringent, fiduciary duty for investment advisors.
Despite the express mandate given to it by Section 913 of the Dodd-Frank Act, the SEC has made slow progress in determining whether to adopt a uniform fiduciary standard rule. In January 2011, the SEC issued its Section 913 Report, recommending “the consideration of rulemakings” that would establish a uniform fiduciary standard for both broker-dealers and investment advisers. In the wake of issuing its Section 913 Report, in March 2013 the SEC opened its doors comments, requesting data and other information relating to the costs and benefits of implementing a uniform fiduciary standard. While the comment period ended in July of 2013, the SEC has apparently not yet completed its anticipated cost-benefit analysis. Based on the SEC’s regulatory agenda for the 2014 fiscal year, it does not seem to be in much of a rush: in the agenda, the SEC listed the “Personalized Investment Advice Standard of Conduct” as a “long-term action” and as its 40th priority out of 43 items. That said, in a speech at the SEC Speaks Conference in Washington on February 21, 2014, SEC Chair Mary Jo White said she wants the five SEC commissioners to come to a conclusion on the issue, and that it is “a primary, immediate focus.”
Perhaps the hold-up stems from the thousands of comment letters to the SEC (both before and after the issuance of the Section 913 Report), making a wide array of suggestions on the matter. Most of these comments relate to how the SEC should adopt a uniform fiduciary standard, as opposed to whether it should do so. Notably, however, the FINRA may already have added a fiduciary duty requirement into its suitability rule, which it revised effective July 2012. In initially providing guidance for its revisions to the rule, FINRA stated in its Regulatory Notice 12-25 that the suitability obligation includes a requirement to act in the “best interests of the client.” More recently, in October of 2013, FINRA issued its “Report on Conflicts of Interest,” providing that “[a]n effective practice is to add to a firm’s code of conduct, or other appropriate documents, a best-interest-of-the-customer standard . . . [for] personalized recommendations to retail customers.”
Consistent with its new approach, FINRA has indicated its approval of a uniform fiduciary standard, but recommends a rule that “respects the purpose of the enacting legislation and allows for the differences between the investment adviser and broker-dealer models.” Essentially, FINRA argues, SEC could not impose such a standard by “merely export[ing] to broker-dealers the regulatory scheme applied to advisers under the Advisers Act or eliminates[ing] the broker-dealer exemption from that statute.”
While it is clear that the direction is toward a more stringent standard for broker-dealer, given the SEC’s 2014 regulatory agenda, it is unlikely that proposed rules are forthcoming any time soon even despite SEC Chair Mary Jo White’s recent comments. In any event, prior to the adoption of a final rule, any proposed rule will need to await the requisite comment period. As a result, despite Section 913 of the Dodd-Frank Act’s authorization of the SEC to establish a fiduciary duty for brokers “no less stringent than the standard applicable to investment advisers,” no such standard seems imminent at this time.