Close Close

Regulation and Compliance > Federal Regulation > SEC

In Broker Harmonization Debate, the SEC Is the Real Problem

Your article was successfully shared with the contacts you provided.

The current debate over the regulation of brokers and investment advisors has been raging for almost four years now, ever since President Obama signed the Dodd-Frank Act into law back in 2010. Its Section 913 called for two major changes in the advisory world: a fiduciary standard for brokers that’s “no less stringent” than the current 1940 Act standard for RIAs, and “harmonization” of regulation for brokers and RIAs. Since then, the brokerage industry has been focusing primarily on “harmonization,” calling for FINRA to take over regulating RIAs. In turn, independent investment advisors and financial planners have been calling for brokers to become fiduciaries.

Yet, despite the endless speeches and filings, a central question seems to have been lost in the commotion: Why is there a problem with retail investor protections today? That is, until now. On Nov. 21, the Financial Planning Coalition, along with Fund Democracy and the Consumer Federation of America, submitted a response to yet another SEC request for information about the potential economic impact of a fiduciary standard for brokers (see “‘Faulty’ Analysis Could Torpedo an SEC Fiduciary Rule: Advocates”). It’s the best assessment I’ve seen yet of the current situation; along with a hard-to argue-with, common-sense approach to solving them, the authors don’t pull any punches to make their points.

In their letter, the groups use plain language and clear reasoning to cut through all the smoke and mirrors, to lay the blame for our current regulatory mess on the doorstep of the SEC and tell the regulator what to do about it: “For far too long, commission policy has allowed broker-dealers to market themselves to the public as trusted advisors without imposing the fiduciary standard appropriate to such a relationship of trust. […] The commission has been either unwilling or unable over the past 25 years to develop a rational policy framework for the delivery of personalized investment advice to retail investors.”

Right from the start, the coalition authors call out the SEC for creating most of today’s investor confusion: “It is the commission’s past actions, and inaction, that have been primarily responsible for blurring the lines between broker-dealers and investment advisors. That is something the commission has been reluctant to acknowledge in the past, choosing to blame the statutes and the natural evolution of the market, rather than the agency’s interpretation of the statutes. […] It was the commission itself that erased the line between broker-dealers and investment advisors when it allowed brokers to call their sales representatives by titles such as financial consultant and financial advisor, to offer services such as financial planning and investment planning that were clearly advisory in nature, and to market themselves as if advice were the primary service they had to offer.”

The coalition then spells out the areas in which it feels that “the commission has gone astray in the past: depicting the differences between the suitability standard that applies to sales recommendations and the fiduciary duty that applies to investment advice; identifying the investor harm that regulation is intended to rectify; describing the regulatory conditions that permit that harm to occur; describing the form that harm takes and the means by which the harm occurs; identifying the regulatory alternatives available to address that investor harm; and, assessing the likely effectiveness of the “various possible approaches to reducing investor harm.”

Strong words, especially for a regulator that likes to appear above the fray between the brokerage and investment advisory worlds, and whose primary mission is to “protect the investing public.” But the coalition continues its attack by switching focus to the SEC’s refusal to date to address the damage caused by such confusion: “Just as it has sought to deflect responsibility for blurring the lines between brokers and advisors, the Commission has in the past sought to gloss over the harm to investors that results from its de facto regulatory policy of allowing brokers to hold themselves out as advisors without regulating them accordingly.”

The coalition enumerates the ways that investors can be harmed when they take “advice” from a financial professional whom they mistakenly believe to be acting as a fiduciary:

1)     “[They] may be misled into believing the sales recommendations offered by broker-dealers constitute such advice.”

2)     “[Their] reasonable expectation that the recommendations they receive will be designed to serve their best interests will often not be met.”

3)     “The investor will likely never realize that they have received suboptimum recommendations or that better options were available to them.”

4)     “Investors who receive ‘suitable’ sales recommendations from broker-dealers may nonetheless pay excessive costs, be exposed to unnecessary risks or receive substandard performance.”

5)     “The result may be an inadequately funded retirement or other unmet financial goal.”

To wrap up, the coalition does offer some suggestions about how the SEC can clean up its own mess, but “if, and only if, the commission embraces these fundamental principles can it at long last develop a rational, pro-investor regulatory policy governing the provision of personalized investment advice to retail investors.”

The coalition urged the SEC to adopt the following principles:

  • “Professionals who are performing the same services should be subject to the same standards.
  • “Misleading practices should not be tolerated.
  • “Regulations that offer the pretense but not the reality of enhanced investor protection are worse than no regulation at all.”

The beauty of the coalition’s letter is both its simplicity and its strategy to not take sides in the broker-RIA debate. Rather, these organizations put the current retail-investing situation directly on the SEC itself—where it belongs. The coalition is saying, “You created this mess, now you clean it up.” Whether the commission will listen is anybody’s guess. But from now on, the debate has changed—the SEC is now the problem. It will also have to become the solution.

[Click here to read the entire letter.]


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.