In a Friday morning session at the Investment Adviser Association’s Spring Compliance Conference, a panel led by IAA Executive Director David Tittsworth explored the history of Dodd Frank and the implications for investment advisors and broker-dealers of several sections of Dodd Frank, particularly Section 913 of the act, which called for a study, delivered on Jan. 21 of this year, on extending a fiduciary standard to all advice givers.
On the fiduciary issue, Tittsworth (a regular blogger for AdvisorOne) said it was likely that a rulemaking on the fiduciary standard will emanate from the SEC in the April to July timeframe. When asked by Tittsworth (left) if the fiduciary duty for IAs would be altered to accommodate broker-dealers, David Blass, associate general counsel for the SEC, responded by saying that any change would only strengthen the current fiduciary standard for RIAs.
Noting the “confusion among investors,” Blass argue that there is “a need for a uniform fiduciary standard for investment advisors and broker-dealers,” saying that measured by the legal standard, it’s “meaningless what form of advice” an investor receives, or “who you select to provide that advice.”
The SEC attorney noted, however, that in the study delivered to Congress under Section 913, the SEC’s staff recognized, and contemplated but didn’t recommend, establishing additional disclosure requirements for BDs—“they don’t have a part II of the Form ADV for disclosure”—in addition to the disclosure requirements surrounding principal trading, noting that BDs often act in a principal capacity, especially in the fixed income space.
Other items considered but not finalized by the staff included the idea of requiring continuing education for RIAs–"that hasn’t been part of the IA regulatory scheme, but the staff recommended further study.” Other areas considered in harmonizing RIA and BD regulations were in advertising—“broker-dealer rules on advertising are quite different than your own”—he said to the mostly RIA audience, in addition to finders and solicitors; supervision and supervisory requirements, and even books and records.
With more than 30 SEC staff members, and an SEC Commissioner, speaking during the two-day conference, the 220 attendees, mostly chief compliance officers for larger RIAs—though there were more than a few broker-dealer compliance officers also in attendance—the IAA meeting is a high-level, no-nonsense gathering, and the other members of the day's first panel reflected
that seriousness, though humor, especially from Tittsworth, leavened the discussions. (See Washington Bureau Chief Melanie Waddell’s report from day one of the conference, featuring John Walsh of the SEC warning that more frequent RIA exams are likely.)
During Friday’s opening session, David Oestreicher, chief legal counsel for T. Rowe Price, placed Dodd-Frank and Section 913 into context, recalling that “the world used to be a simpler place,” where brokers were regulated by FINRA under a rules-based approach while advisors were SEC-regulated under a principles-based approach and with a fiduciary standard.
Then beginning in the mid-1990s with the Tully report and moving in the 2000s to the FPA’s successful lawsuit challenging the broker-dealer exemption, aka the Merrill Rule, the scope of the discussion started to change. More recently, he said the Treasury Department’s 2008 blueprint and the White House’s 2009 white paper on the re-regulation of financial services, “were important in framing” 2010’s Dodd Frank Act.
Michael Koffler, partner with the New York-based law firm of Sutherland Asbill & Brennan, followed by calling Section 913 and the fiduciary issue a “long and winding road with lots more highway still to go; this has been a hot potato.” While he acknowledged that in the report to Congress “a few core recommendations were made,” he lamented that on “the tough issues, we haven’t started to deal with them on a very substantive basis.”
He pointed out the question of whether advice is solely incidental to the investor-BD relationship is the “exact opposite now” to what the brokererage world was like 30 years ago, saying “the transaction is now incidental,” putting aside primary offerings of securities. Back then, he said, broker-dealers “made their living on commissions; that’s no longer the case,” and that with advances in technology, “no one’s making a living on trading.” There remains a tension, Koffler said, in saying “We’re not going to water down the fiduciary standard, but we’re also not going to change the broker-dealer business model.”