Feds Propose Uniform Rules for Brokers and Financial Advisors

One of the online discount brokerage companies airs a commercial in which investors complain about their treatment at the hands of their full service brokers, who charge bigger fees.

Perhaps the Securities and Exchange Commission (SEC) has also heard these complaints, because the regulatory agency has sent Congress a package of recommendations to establish standards for both broker-dealers and investment advisors, bringing the rules into alignment.

The standards would apply when financial professionals provide personalized investment advice about securities to retail investors. In essence, it would put brokers under the same rules that cover investment advisors; in their dealings with the client, they must put the interests of the client first.

Required under the Dodd-Frank Act

The recommendations are part of a study that looked into obligations and standards of conduct of financial professionals, that was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the study, the SEC staff notes that investment advisers and broker-dealers are regulated extensively under different regulatory regimes. However, many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers.

The study finds that "many investors are also confused by the standards of care that apply to investment advisers and broker-dealers" when providing personalized investment advice about securities. For example, if your advisor suggests a particular mutual fund, what kind of arrangement does she have for commissions? Currently, investment advisors are under different rules than brokers.

The study further states that "retail investors should not have to parse through legal distinctions to determine" the type of advice they are entitled to receive.

Uniform protection

"Instead, retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer," the staff report says.

At the same time, the study notes that retail investors should "continue to have access to the various fee structures, account options, and types of advice that investment advisers and broker-dealers provide."

As a result, the study recommends that the SEC adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. The standard, according to the study, should be "no less stringent than currently applied to investment advisers under [the] Advisers Act."

The study also "recommends that when broker-dealers and investment advisers are performing the same or substantially similar functions, the SEC should consider whether to harmonize the regulatory protections applicable to such functions."