Harmonization of Investment Adviser and Broker-Dealer Regulation

Overview

“The SEC staff suggested that when broker-dealers and investment advisers are performing the same or substantially similar functions, harmonization should be considered.”

Under current law, investment advisers and broker-dealers are subject to differing regulatory requirements under two statutes with different purposes. The purpose of the Advisers Act is to address concerns with respect to firms that provide investment advice (typically referred to as the “buy side”), while the purpose of the Securities Exchange Act of 1934 is to address concerns regarding the securities markets and their participants (the “sell side”). In connection with a 2011 SEC study required by Section 913 of the Dodd-Frank Act, the SEC staff suggested that when broker-dealers and investment advisers are performing the same or substantially similar functions, “harmonization should be considered to the extent that such harmonization appears likely to add meaningful investor protection.” The staff report suggested that the SEC consider such harmonization in the areas of advertising, the use of finders and solicitors, remedies, supervision, licensing, registration, licensing and continuing education requirements for associated persons, and books and records.

In March 2013, the SEC issued a request for data and other information regarding a potential uniform fiduciary standard of conduct, which included requests concerning the potential harmonization of investment adviser and broker-dealer regulation. The IAA filed a comment letter in response, and the comment period for the SEC request closed on July 5, 2013. The SEC has not yet taken further action on this issue.

Position

“We oppose wholesale application of check-the-box broker-dealer regulation to investment advisers.”

The IAA believes that investment advisers’ activities are appropriately covered by the Advisers Act overarching fiduciary duty and rules designed for such activities. We would oppose wholesale application of “check-the-box” broker-dealer regulation to investment advisers. Despite a blurring of the lines as some broker-dealers have moved toward advisory activities, significant differences remain between the core activities of most broker-dealers and investment advisers. Imposing the broker-dealer regulatory regime, which is targeted to “sell side” activities, on investment advisers would fail to recognize those fundamental differences and would impose substantial costs without corresponding investor protection benefits. Further, such an approach fails to appreciate the breadth and scope of the fiduciary duty and Advisers Act rules.

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