Is the Time Ripe for the SEC to Regulate Broker/Advisor Titles?

As the Securities and Exchange Commission mulls a fiduciary standard rule of its own, should the agency also tackle regulating advisor and broker titles?

Industry officials and a former SEC commissioner recently debated the merits of the securities regulator taking on such a task, with Jim Allen, head of capital markets policy at CFA Institute, arguing that the agency should require those who call themselves “advisors,” be it with an “o” or an “e,” or “who are providing personalized investment advice as something more than just an incidental part of their businesses,” to register as investment advisors, thereby binding them to fiduciary regulations established under the Investment Advisers Act.

While not a particularly new idea, such a regulatory reining in of titles is gaining renewed debate as the SEC re-energizes its fiduciary focus.

Common law interpretations of the act “include an imputation of a fiduciary duty of care for registered investment advisors,” Allen said during a webcast held on Sept. 6.

“If everyone who is either engaged in or holding themselves out as advisors has to register under the Advisers Act, there is no need” for what the SEC’s Investor Advisory Committee has called “a parallel body of law — i.e., a separate SEC-created fiduciary duty rule,” Allen argued on the webcast, which was sponsored by TD Ameritrade Institutional.

Those not registered as an advisor would operate under “the lower suitability standard of care, yes,” Allen continued, “but they wouldn’t be able to provide investment advice as a routine, primary part of their jobs. Nor would they be able to tell investors that they are advisors. Rather, they would have to let them know of their sales roles, thereby giving investors a fighting chance of grasping the difference” between an advisor and a broker.

Former SEC Commissioner Luis Aguilar agreed during the webcast that many broker-dealers “market themselves as financial advisors, which exacerbates investor confusion.”

As multiple studies have shown, “most individuals cannot distinguish one type of advisor from the other,” Aguilar continued. “Beyond the confusion, brokers who provide personalized investment advice are being allowed to end run the Advisers Act and its higher fiduciary standard, and are not required to disclose the same level of information and many of the conflicts that they have.”

A staunch advocate of the agency moving forward on a fiduciary rule during his time at the commission, Aguilar stated that the SEC should “move away from a two-tiered market, which [has] different client obligations, and move toward a uniform fiduciary standard of care for all those who provide investment advice no matter what title is on their individual business card.”

The SEC “has always had the authority to act by rulemaking [on a fiduciary standard], and it should act,” Aguilar said. “Why it’s taken so long is an embarrassment.”

Sorting Through the Titles

As Brian Hamburger, CEO of regulatory consulting firm MarketCounsel, noted on the recent webcast, in 1999 — under what is commonly referred to as the broker-dealer exemption — the SEC said that brokers’ fee-based advice “did not have to include a fiduciary responsibility as long as the broker wasn’t making the final investment decision,” sparking a proliferation in the early 2000s of fee-based brokerage accounts.

Brokerage firms then started to “dress up” as independent advisors and started to “rebrand” the broker role — with firms applying different titles to registered reps like financial consultant, financial representative and wealth manager — with the message from the firms being: “‘Whatever you do, don’t call them brokers.’”

Aguilar, who’s now a partner at Falcon Cyber Investments LLC, added that while he supports “clarity” on the use of titles, “I focus more on what they [advisors/brokers] do — not necessarily on their title.”

The SEC, in any potential rulemaking, “will have to be creative in trying to address what titles are appropriate” in complying with a fiduciary standard.

What About the Fiduciary Rule?

But will the SEC finally take action on its own fiduciary rulemaking? Aguilar opined that it really depends on whether the Department of Labor’s fiduciary rule “stays its course.” The SEC “will have more of an impetus to take action because of the duality” of advisors and brokers covered under DOL’s rule under ERISA and the SEC’s rule under securities laws, he said.

I’d be remiss not to note that the Trump administration has nominated two new SEC commissioners who must vote on such a rulemaking — Mercatus Fellow Hester Peirce and Columbia Law School Professor Robert Jackson. Peirce has been a vocal opponent of a fiduciary rulemaking at the agency (as well as a critic of Labor’s rule), while Jackson has yet to publicly state his views on such regulation.

However, as Aguilar noted, Clayton has signaled that fiduciary rulemaking is a priority for him.

Knut Rostad, president of the Institute for the Fiduciary Standard, sees a rule addressing broker and advisor titles having the best chance at passage as “a separate rule.”

The Labor Department said on Aug. 30 that it was proposing an 18-month delay of the more onerous provisions of its fiduciary rule from Jan. 1 to July 1, 2019, and sought comments for 15 days. The SEC has also been seeking feedback on a fiduciary rulemaking of its own, with no set comment period timeline.

Even in the face of a potential delay, Rep. Ann Wagner, R-Mo., said on Sept. 7 at an event held at the U.S. Chamber of Commerce in Washington that she planned to introduce her bill to repeal Labor’s fiduciary rule by the end of September, moving it to “markup” soon thereafter.

Wagner, who chairs the House Financial Services Committee’s Oversight and Investigations Subcommittee, floated the draft bill, which also keeps a fiduciary rulemaking under the SEC’s jurisdiction, in mid-July.

Wagner said that her bill establishes “a best-interest standard for broker-dealers” and repeals Labor’s fiduciary rule “period. Full stop. And it gets the Department of Labor out of the broker-dealer space.”

Her as-yet-unnamed bill was set to be introduced before SEC Chairman Jay Clayton testifies before the House Financial Services Committee in early October.

What Should the SEC Do?

In its comment letter to the SEC detailing how the agency should go about crafting a fiduciary standard, the Investment Adviser Association also highlighted the “widespread confusion over the ways that financial professionals hold themselves out to the public,” with investors being unclear about the key distinctions between broker-dealers and investment advisors.

Investors, IAA argued, also do not understand the varying legal duties of and standards imposed on broker-dealers and investment advisors. “This confusion is exacerbated by financial professionals using terms such as ‘financial adviser’ or ‘financial advisor’ that imply a relationship of trust and confidence, but where those professionals disclaim fiduciary responsibility for the relationship.”

IAA urged the SEC to “prohibit firms or individuals from holding themselves out in a way that implies a relationship of trusted advisor” without being subject to either the Advisers Act fiduciary principles or “an equally strong new standard under the Exchange Act.”

But the Consumer Federation of America, Barbara Roper, director of investor protection told the SEC in her recent comment letter, has said for 20 years that “the central problem in the market for investment advice is not that investors are confused, it’s that investors are being actively misled” because “broker-dealers have been permitted to rebrand themselves as advisors, offer extensive advisory services, and market their services as if investment sales were solely incidental to advice, rather than the other way around, all while being exempted from the fiduciary standard of conduct appropriate to that role.”

Roper told me in separate comments that if the SEC does delve into regulating titles, the agency would have to do so in tandem with fiduciary rulemaking — while also dealing with how brokers market themselves.

The SEC could adopt a rule “reestablishing the functional distinction between brokers acting exclusively as salespeople and advisors, but you’d need to combine it with rulemaking to strengthen the standard that applies when brokers hold out as advisors,” such as in a fiduciary rule, “because the Advisers Act … doesn’t begin to adequately address the complex and toxic conflicts of interest that pervade the broker-dealer business model.”

— Read State Fiduciary Rules Create a Regulatory ‘Mess’ on ThinkAdvisor.

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