[Federal Register Volume 78, Number 45 (Thursday, March 7, 2013)]
[Notices]
[Pages 14848-14866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69013; IA-3558; File No. 4-606]
Duties of Brokers, Dealers, and Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Request for data and other information.
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SUMMARY: The Securities and Exchange Commission is requesting data and
other information, in particular quantitative data and economic
analysis, relating to the benefits and costs that could result from
various alternative approaches regarding the standards of conduct and
other obligations of broker-dealers and investment advisers. We intend
to use the comments and data we receive to inform our consideration of
alternative standards of conduct for broker-dealers and investment
advisers when providing personalized investment advice about securities
to retail customers. We also will use this information to inform our
consideration of potential harmonization of certain other aspects of
the regulation of broker-dealers and investment advisers.
DATES: Comments should be received on or before July 5, 2013.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Submission:
Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
Send an email to [email protected]. Please include
File Number 4-606 in the subject line.
Paper Submission:
Send paper submissions in triplicate to Elizabeth M.
Murphy, Secretary, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-1090. All submissions should refer to File
Number 4-606. This file number should be included on the subject line
if email is used. To help us process and review your comments more
efficiently, please use only one method. The Commission will post all
submissions of data on the Commission's Internet Web site (http://www.sec.gov). Comments are also available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. Please refer to the Appendix at the end of this
release for instructions on submitting data and other information.
FOR FURTHER INFORMATION CONTACT: Jennifer Marietta-Westberg, Assistant
Director, Matthew Kozora, Financial Economist, Division of Risk,
Strategy and Financial Innovation, at (202) 551-6655; David W. Blass,
Chief Counsel, Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Emily Westerberg Russell, Senior Special Counsel, Daniel
Fisher, Branch Chief, Leila Bham, Special Counsel, Division of Trading
and Markets, at (202) 551-5550; Office of Chief Counsel, at (202) 551-
6825 and Office of Investment Adviser Regulation, at (202) 551-6787,
Division of Investment Management; Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-1090.
Discussion
I. Introduction
A. Background
Today, broker-dealers and investment advisers routinely provide to
retail customers \1\ many of the same services, and engage in many
similar activities related to providing personalized investment advice
about securities to
[[Page 14849]]
retail customers.\2\ While both investment advisers and broker-dealers
are subject to regulation and oversight designed to protect retail and
other customers, the two regulatory schemes do so through different
approaches notwithstanding the similarity of certain services and
activities.
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\1\ For the purposes of this request for comment, and as noted
in Part III below, the term ``retail customer'' has the same meaning
as in Section 913 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Public Law 111-203, 124 Stat. 1376 (2010).
Specifically, it means ``a natural person, or the legal
representative of such natural person, who (A) receives personalized
investment advice about securities from a broker, dealer or
investment adviser; and (B) uses such advice primarily for personal,
family, or household purposes.'' 15 U.S.C. 80b-11(g)(2).
\2\ In 2006, the SEC retained the RANDCorporation's Institute
for Civil Justice (``RAND'') to conduct a survey, which concluded
that the distinctions between investment advisers and broker-dealers
have become blurred, and that market participants had difficulty
determining whether a financial professional was an investment
adviser or a broker-dealer and instead believed that investment
advisers and broker-dealers offered the same services and were
subject to the same duties. RAND noted, however, that generally
investors they surveyed as part of the study were satisfied with
their financial professional, be it a representative of a broker-
dealer or an investment adviser. Angela A. Hung, et al., RAND
Institute for Civil Justice, Investor and Industry Perspectives on
Investment Advisers and Broker-Dealers (2008) (``RAND Study'').
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Investment advisers are fiduciaries to their clients, and their
regulation under the Investment Advisers Act of 1940 (``Advisers Act'')
is largely principles-based. In contrast, a broker-dealer is not
uniformly considered a fiduciary to its customers.\3\ Broker-dealer
conduct is subject to comprehensive regulation under the Securities
Exchange Act of 1934 (``Exchange Act'') and the rules of each self-
regulatory organization (``SRO'') to which the broker-dealer belongs.
Both broker-dealers and investment advisers also are subject to
applicable antifraud provisions and rules under the federal securities
laws.
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\3\ A broker-dealer may have a fiduciary duty under certain
circumstances. This duty may arise under state common law, which
varies by state. Generally, courts have found that broker-dealers
that exercise discretion or control over customer assets, or have a
relationship of trust and confidence with their customers, are found
to owe customers a fiduciary duty similar to that of investment
advisers. See, e.g., United States v. Skelly, 442 F.3d 94, 98 (2d
Cir. 2006); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002);
Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson,
Inc., 3 F.3d 208, 212 (7th Cir. 1993); MidAmerica Fed. Savings &
Loan Ass'n v. Shearson/American Express Inc., 886 F.2d 1249, 1257
(10th Cir. 1989); Leib v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff'd, 647 F.2d
165 (6th Cir. 1981). For the staff's discussion of relevant case law
see Study, infra note 10, at 54-55. See also A Joint Report of the
SEC and the CFTC on Harmonization of Regulation (Oct. 2009),
available at http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf at 8-9 and 67.
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Studies suggest that many retail customers who use the services of
broker-dealers and investment advisers are not aware of the differences
in regulatory approaches for these entities and the differing duties
that flow from them.\4\ Some of these regulatory differences primarily
reflect the different functions and business activities of investment
advisers and broker-dealers (for example, rules regarding underwriting
or market making). Other differences reflect statutory differences,\5\
particularly when broker-dealers and investment advisers engage in the
same or substantially similar activity (for example, providing
personalized investment advice, including recommendations, about
securities to retail customers).
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\4\ See, e.g., RAND Study.
\5\ Advisers Act Section 202(a)(11) defines ``investment
adviser'' to mean ``any person who, for compensation, engages in the
business of advising others, either directly or through publications
or writings, as to the value of securities or as to the advisability
of investing in, purchasing, or selling securities, or who, for
compensation and as part of a regular business, issues or
promulgates analyses or reports concerning securities.'' Advisers
Act Section 202(a)(11)(C) excludes from the investment adviser
definition any broker or dealer (i) whose performance of its
investment advisory services is ``solely incidental'' to the conduct
of its business as a broker or dealer; and (ii) who receives no
``special compensation'' for its advisory services. Broker-dealers
providing investment advice in accordance with this exclusion are
not subject to the fiduciary duty under the Advisers Act.
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Over the decades since the Advisers Act and Exchange Act were
enacted, we have observed that the lines between full-service broker-
dealers and investment advisers have blurred.\6\ Investment advisers
and broker-dealers, for example, provide investment advice both on an
episodic and on an ongoing basis.\7\ We have expressed concern when
specific regulatory obligations depend on the statute under which a
financial intermediary is registered instead of the services
provided.\8\
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\6\ See Certain Broker-Dealers Deemed Not to be Investment
Advisers, Exchange Act Release No. 51523 at 3 and 37 (Apr. 12, 2005)
(``Release 51523''). Many financial services firms may offer both
investment advisory and broker-dealer services. According to data
from the Investment Adviser Registration Depository as of November
1, 2012, approximately 5% of Commission-registered investment
advisers reported that they also were registered as a broker-dealer,
and 22% of Commission-registered investment advisers reported that
they had a related person that was a broker-dealer. As of October
31, 2012, 755 firms registered with FINRA as a broker-dealer, or
approximately 17.4% of broker-dealers registered with FINRA, were
also registered as an investment adviser with either the Commission
or a state. See Letter from Angela Goelzer, FINRA, to Lourdes
Gonzalez, Assistant Chief Counsel, Securities and Exchange
Commission (Nov. 16, 2012). Further, as of mid-November 2012,
approximately 41% of FINRA-registered broker-dealers had an
affiliate engaged in investment advisory activities. Id. Many of
these financial services firms' personnel may also be dually
registered as investment adviser representatives and registered
representatives of broker-dealers. As of October 31, 2012,
approximately 86% of investment adviser representatives were also
registered representatives of a FINRA-registered broker-dealer. Id.
\7\ A broker-dealer that receives special compensation for the
provision of investment advice would not be excluded from the
definition of investment adviser. See supra note 5.
\8\ In Release 51523, we engaged in an analysis and discussion
of the history of the Exchange Act and Advisers Act. We explained
that the Advisers Act was intended to regulate what, at the time
that Act was enacted, was a largely unregulated community of persons
engaged in the business of providing investment advice for
compensation. See Release 51523 at 22.
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In a staff study (the ``Study'') required by Section 913 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
``Dodd-Frank Act''),\9\ our staff made recommendations to us that the
staff believed would enhance retail customer protections and decrease
retail customers' confusion about the standard of conduct owed to them
when their financial professional provides them personalized investment
advice.\10\ The staff made two primary recommendations in the Study.
The first recommendation was that we engage in rulemaking to implement
a uniform fiduciary standard of conduct for broker-dealers and
investment advisers when providing personalized investment advice about
securities to retail customers. The second recommendation was that we
consider harmonizing certain regulatory requirements of broker-dealers
and investment advisers where such harmonization appears likely to
enhance meaningful investor protection, taking into account the best
elements of each regime.\11\
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\9\ Publci Law 111-203, 124 Stat. 1376. Section 913 of the Dodd-
Frank Act, among other things, required a study of the effectiveness
of the existing legal or regulatory standards of care that apply
when broker-dealers and investment advisers (and persons associated
with them) provide personalized investment advice and
recommendations about securities to retail customers. It also
required the identification of any legal or regulatory gaps,
shortcomings, or overlaps in legal or regulatory standards in the
protection of retail customers relating to the standards of care for
providing personalized investment advice about securities to retail
customers that should be addressed by rule or statute.
\10\ Staff of the U.S. Securities and Exchange Commission, Study
on Investment Advisers and Broker-Dealers As Required by Section 913
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Jan. 2011) (``Study''), available at www.sec.gov/news/studies/2011/913studyfinal.pdf. The views expressed in the Study were those of
the staff and do not necessarily reflect the views of the Commission
or the individual Commissioners. See also Statement by SEC
Commissioners Kathleen L. Casey and Troy A. Paredes (Jan. 21, 2011)
(``Statement'') (opposing the Study's findings and, among other
things, stating that ``stronger analytical and empirical foundation
than provided by the Study is required before regulatory steps are
taken that would revamp how broker-dealers and investment advisers
are regulated'').
\11\ As discussed in more detail below, we have a variety of
options relating to the staff's recommendations; we could take no
action with regard to either, or could take action to implement one
or both recommendations, either partially or wholly. The choice of
whether and how to take an action with respect to the
recommendations would consider the facts and circumstances of the
marketplace at the time of the potential action, as well as the
regulatory landscape existing at such time (including, if
applicable, any prior or contemporaneous actions which would impact
the recommendations).
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[[Page 14850]]
The staff explained that its recommendations were intended to
address, among other things, retail customer confusion about the
obligations broker-dealers and investment advisers owe to those
customers, and to preserve retail customer choice without decreasing
retail customers' access to existing products, services, service
providers or compensation structures.\12\ The staff stated in the Study
that retail customers should not have to parse legal distinctions to
determine whether the advice they receive from their financial
professional is provided in their best interests, and stated that
retail customers should receive the same or substantially similar
protections when obtaining the same or substantially similar services
from financial professionals.\13\ The staff further noted that the
Commission could consider harmonization as part of the implementation
of the uniform fiduciary standard or as separate initiatives.\14\
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\12\ Study at viii, x, 101, 109, and 166.
\13\ Study at viii and 101.
\14\ Study at 129.
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In preparing the Study's discussion of the benefits and costs of
aspects of the staff's recommendations, the staff, among other things,
considered comment letters that we received in response to an earlier
request, and reiterated this request when meeting with interested
parties, in order to better inform the Study.\15\ Few commenters,
however, provided data regarding the benefits and costs of the current
regulatory regime or the benefits and costs likely to be realized if we
were to exercise the authority granted in Section 913. This may be
because most comments were made in advance of the Study's publication
and could not be informed by the staff's specific recommendations.\16\
Of the relatively few comments received after publication of the Study,
one commenter expressed support for further economic analysis of the
Study's recommendations and other approaches for Commission rulemaking,
and offered to provide data and other information relating to
implementing a uniform fiduciary standard of conduct.\17\
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\15\ Study Regarding Obligations of Brokers, Dealers, and
Investment Advisers, Exchange Act Release No. 62577 (July 27, 2010)
(requesting comment from the public to inform the preparation of the
Study). The Commission received over 3,500 comment letters before
and after publication of the Study. The comment letters are
available at www.sec.gov/comments/4-606/4-606.shtml.
\16\ Before the Study was published, we received a comment
describing results of a survey that had been conducted based on
certain assumptions about a potential change in the standard of
conduct, which differ from those set out in this request for
information and data. The survey, for example, assumed that under a
new standard of conduct, broker-dealer firms would no longer charge
commissions and instead would only maintain fee-based accounts. See
Oliver Wyman and Securities Industry and Financial Markets
Association, Standard of Care Harmonization Impact Assessment for
SEC (Oct. 27, 2010).
\17\ Comment Letter from Ira D. Hammerman, Senior Managing
Director and General
Counsel, Securities Industry and Financial Markets Association
(July 14, 2011) (``SIFMA Letter'') at 2. But see, Comment Letter
from Barbara Roper, Director of Investor Protection, Consumer
Federation of America, et al., (Mar. 28, 2012) (``Roper Letter'')
(asserting adoption of a uniform standard could be implemented in a
way that does not lead to reduced investor choice or product
access).
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The Study recommended that we engage in rulemaking using the
authority provided to us in Section 913 of the Dodd-Frank Act. The
section grants us discretionary rulemaking authority under the Exchange
Act and Advisers Act to adopt rules establishing a uniform fiduciary
standard of conduct for all broker-dealers and investment advisers when
providing personalized investment advice about securities to retail
customers.\18\ That section further provides that such standard of
conduct ``shall be to act in the best interest of the customer without
regard to the financial or other interest of the broker, dealer, or
investment adviser providing the advice'' and that the standard ``shall
be no less stringent than the standard applicable to investment
advisers under Sections 206(1) and 206(2) of the Advisers Act when
providing personalized investment advice about securities.''
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\18\ See Section 15(k) of the Exchange Act and Section 211(g) of
the Advisers Act, each as added by Section 913 of the Dodd-Frank
Act. Section 913 of the Dodd-Frank Act also added Section 15(l) of
the Exchange Act and Section 211(h) of the Advisers Act to add
discretionary authority to promulgate rules prohibiting or
restricting certain broker-dealer and investment adviser sales
practices, conflicts of interests, and compensation schemes that the
Commission deems contrary to the public interest and the protection
of investors. See Exchange Act each as added by Section 913 of the
Dodd-Frank Act.
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The Commission recognizes that Section 913 of the Dodd-Frank Act
does not mandate that we undertake any such rulemaking, and the
Commission has not yet determined whether to commence a rulemaking. We
expect that the data and other information provided to us in connection
with this request will assist us in determining whether to engage in
rulemaking, and if so, what the nature of that rulemaking ought to be.
Among other considerations, we are sensitive to the fact that changes
in existing legal or regulatory standards could result in economic
costs and benefits and believe that such costs and benefits must be
considered in the economic analysis that would be part of any
rulemaking under the discretionary authority provided by Section 913 of
the Dodd-Frank Act. In considering the options for a potential standard
of conduct applicable to broker-dealers and investment advisers
providing personalized investment advice to retail customers, we will
take into account existing regulatory obligations that apply today to
broker-dealers and investment advisers.
If we determine to engage in rulemaking, furthermore, the
rulemaking process would provide us the opportunity to request further
data and other information on the range of complex considerations
associated with any proposal implementing such a standard, including
any potential costs and benefits associated with the rulemaking. The
rulemaking process would also allow commenters to address the extent to
which any proposal would further the goals highlighted by Section 913,
including (1) preserving retail customer choice with respect to, among
other things, the availability of accounts, products, services, and
relationships with investment advisers and broker-dealers, and (2) not
inadvertently eliminating or otherwise impeding retail customer access
to such accounts, products, services and relationships (for example,
through higher costs). We may also consider reassessing and potentially
harmonizing certain of the other regulatory obligations that apply to
broker-dealers and investment advisers where such harmonization is
consistent with the mission of the Commission.
B. Overview of the Request for Additional Data and Other Information
We are requesting below additional public input to assist us in
evaluating whether and how to address certain of the standards of
conduct for, and regulatory obligations of, broker-dealers and
investment advisers. Since publishing the Study, the staff has
continued to review current information and available data about the
current marketplace for personalized investment advice and the
potential economic impact of the staff's recommendations to inform its
consideration of any potential rulemaking with respect to the Study's
recommendations. While we and our staff have extensive experience in
the regulation of broker-dealers and investment advisers, the public
can provide further data and other information to assist us in
determining whether or not to use the authority
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provided under Section 913 of the Dodd-Frank Act.
Data and other information from market intermediaries and others
about the potential economic impact of the staff's recommendations,
including information about the potential impact on competition,
capital formation, and efficiency, may particularly help inform any
action we may or may not take in this area. We also especially welcome
the input of retail customers.
We are specifically requesting quantitative and qualitative data
and other information and economic analysis (herein ``data and other
information'') about the benefits and costs of the current standards of
conduct of broker-dealers and investment advisers when providing advice
to retail customers, as well as alternative approaches to the standards
of conduct, including a uniform fiduciary standard of conduct
applicable to all investment advisers and broker-dealers when providing
personalized investment advice to retail customers. We recognize that
retail customers are unlikely to have significant empirical and
quantitative information. We welcome any information they can provide.
In this release, we discuss a potential uniform fiduciary standard
of conduct and alternatives to that standard of conduct. A uniform
fiduciary standard of conduct can be understood quite differently by
various parties. In fact, public comments on such a standard have made
widely varying assumptions about what a fiduciary duty would require.
Comments have assumed, for example, that a uniform fiduciary duty would
require all firms to, among other things: provide the lowest cost
alternative; stop offering proprietary products; charge only asset-
based fees, and not commissions; and continuously monitor all
accounts.\19\ These outcomes would not necessarily be the case. By
contrast, many of the rules or other obligations discussed over the
years for potential regulatory harmonization, such as recordkeeping,
advertising, pay to play, and other obligations that currently apply to
broker-dealers and investment advisers, are more specific. Accordingly,
we believe that consideration of a uniform fiduciary standard of
conduct would benefit from a set of assumptions and other parameters
that commenters can use and critique in order to generate meaningful
data and other information. The identification of particular
assumptions or parameters, however, does not suggest our policy view or
the ultimate direction of any action proposed by us.
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\19\ See also SIFMA Letter, supra note 17, at 7 and 10
(recommending, among other things, that the Commission articulate a
new uniform standard of conduct, applicable to both broker-dealers
and investment advisers, to ``act in the best interest of the
customer,'' while applying existing case law, guidance, and other
legal precedent developed under Section 206 of the Advisers Act only
to investment advisers, not broker-dealers) compared with the Roper
Letter at 2 (recommending, among other things, that rather than
replacing the current Advisers Act standard with something new and
different, the Commission should extend the existing Advisers Act
standard (currently applicable to investment advisers) to broker-
dealers, while clarifying its applicability in the context of
broker-dealer conduct).
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We also request comment in this release on whether or to what
extent we should consider making other adjustments to the regulatory
obligations of broker-dealers and investment advisers, including
regulatory harmonization. While this release addresses both a potential
uniform fiduciary standard of conduct and regulatory harmonization more
generally, and at times, discusses and requests comment relating to the
potential interrelationship of the two, harmonization beyond a uniform
fiduciary standard of conduct could be considered separately. As noted
below, there are a variety of options relating to whether and how to
act with respect to a potential uniform fiduciary standard of conduct
or potential regulatory harmonization, including taking no action,
taking action to implement one (either partially or wholly) and not the
other, or taking action to implement both (again, either partially or
wholly). In order to inform our consideration of all of these options,
this release discusses both a potential uniform fiduciary standard of
conduct and regulatory harmonization and encourages comment on the
potential practical, regulatory, and economic effects that action or
inaction with respect to one or both may have. For example, we request
comment on the extent to which regulatory harmonization might address
customer confusion about the obligations owed to them by broker-dealers
and not investment advisers (or by investment advisers and not broker-
dealers) even if a uniform fiduciary standard of conduct is
implemented. We also request comment on the extent to which regulatory
harmonization might result in additional investor confusion or
otherwise negatively impact investors.
We request data and other information relating to the provision of
personalized investment advice about securities to retail customers to
better understand the relationship between standards of conduct and the
experiences of retail customers. In particular, we seek data and other
information regarding: (a) Investor returns generated under the
existing regulatory regimes; (b) security selections of broker-dealers
and investment advisers as a function of their respective regulatory
regimes; (c) characteristics of investors who invest on the basis of
advice from broker-dealers, invest on the basis of advice from an
investment adviser, or invest utilizing both channels; (d) investor
perceptions of the costs and benefits under each regime; and (e)
investors' ability, and the associated cost to investors, to bring
claims against their broker-dealer or investment adviser under their
respective regulatory regimes.\20\ We are also particularly interested
in the activities, conflicts of interest\21\ and disclosure practices
of investment advisers and broker-dealers, as well as the economics of
the investment advice industry and characteristics of the current
marketplace. We also are asking for data and other information about
the benefits and costs of the current set of regulatory obligations
that apply to broker-dealers and investment advisers, and the benefits
and costs of different approaches to harmonizing particular areas of
broker-dealer and investment adviser regulation.
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\20\ See Statement.
\21\ In this request for information and data, we use the term
``conflict of interest'' to mean a material conflict of interest.
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C. Suggested Guidelines and Considerations for Submissions of Data and
Other Information
The data and other information requested in this document have the
potential to be instructive in our determination of which, if any, new
approach or approaches to consider implementing with respect to the
regulatory obligations of investment advisers and broker-dealers. We
welcome any relevant data and other information, as well as comment, in
response to our inquiries below. Responsive data and other information
would be more useful to us, however, if they are prepared and submitted
in a consistent fashion. We set forth suggested guidelines
(``Guidelines'') in the Appendix to this request for commenters to
follow, where possible, in submitting data and other information. In
particular, through the Guidelines, we request broker-dealers,
investment advisers, and dually registered investment adviser/broker-
dealers submitting comments to provide specific data and other
information describing their businesses, retail customers, and retail
customer
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accounts. We also request that other commenters (e.g., retail
customers, academics, trade associations, and consumer groups) provide
the information requested in the Guidelines to the extent applicable or
appropriate. We especially welcome the input of retail customers.\22\
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\22\ This includes, where possible, information and data
focusing on accounts that receive non-discretionary advice because
they are most likely to be impacted by changes in the standard of
conduct. See Guidelines in the Appendix.
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We are particularly interested in receiving data and other
information that are empirical and quantitative in nature. We encourage
all interested parties, however, to submit their comments, including
qualitative and descriptive analysis of the benefits and costs of
potential approaches and guidance. As stated above, we recognize that
retail customers are unlikely to have significant empirical and
quantitative information. We welcome any information they can provide.
In addition, if commenters prefer to respond to only some of the
requests for comment, they are welcome to do so.
We describe throughout this request for data and other information
a series of assumptions that commenters may use in order to facilitate
our ability to compare, reproduce, and otherwise analyze responses to
our questions in a robust fashion. The discussion of these assumptions
does not suggest our policy view or the ultimate direction of any
proposed action proposed by us. If commenters believe that we should
make additional or different assumptions as a further analytical step
we invite them to do so and explain clearly the additional or different
assumptions made, address why such assumptions are appropriate, and
compare and contrast results obtained under such assumptions with
results obtained under the assumptions specified in this request. If
commenters wish to submit multiple sets of comments resting on
different sets of assumptions, they may do so. Although we seek to
obtain responses that we can compare, reproduce, and otherwise analyze
in a robust fashion, we also wish to emphasize that commenters have
flexibility to provide whatever data and other information they believe
is important to provide.
Examples of data and other information sought include empirical
data, detailed datasets on a particular topic, economic analysis, legal
analysis, statistical data such as survey and focus group results, and
any other observational or descriptive data and other information. Such
data and other information can be quantitative, qualitative, or
descriptive. Again, commenters are invited to provide any other
information that they believe would be useful to us as we consider our
options in this area.
Commenters should only submit data and other information that they
wish to make publicly available. Commenters concerned about making
public proprietary or other highly sensitive data and other information
may wish to pool their data with others (e.g., through a trade
association, law firm, consulting firm or other group) and submit
aggregated data in response to this request. While we request that
commenters provide enough data and other information to allow us to
compare, replicate, and otherwise analyze findings, commenters should
remove any personally identifiable information (e.g., of their
customers) before submitting data and other information in response to
this request.\23\
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\23\ Cf. 17 CFR 248.3(u)(1) (defining for purposes of Regulation
S-P, ``personally identifiable financial information'' as ``any
information: (i) A consumer provides to you to obtain a financial
product or service from you; (ii) About a consumer resulting from
any transaction involving a financial product or service between you
and a consumer; or (iii) You otherwise obtain about a consumer in
connection with providing a financial product or service to that
consumer.'').
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II. Request for Data and Other Information Relating to the Current
Market for Personalized Investment Advice
We are requesting data and other information about the specific
costs and benefits associated with the current regulatory regimes for
broker-dealers and investment advisers\24\ as applied to particular
activities as a baseline for comparison, as described below.
Accordingly, and in addition to the request for data and other
information which follows in Parts III and IV below, we request data
and other information relating to the economics and characteristics of
the current regulatory regime, and other data and other information
relating to investment adviser and broker-dealer conflicts of interest
and the cost and effectiveness of disclosure. Many of the requests ask
commenters to provide data and other information describing retail
customer demographics and accounts; broker-dealer or investment adviser
services offered to retail customers; security selections by or for
retail customers; and the claims of retail customers in dispute
resolution. We request commenters refer to the Appendix for the
specific characteristics of each of these topics that are important to
include when submitting data and other information. We also request
commenters refer to other guidelines in the Appendix, particularly the
request to provide background information and documentation to support
any economic analysis.
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\24\ Please see our staff's discussion in the Study about the
existing regulatory structures for investment advisers and broker-
dealers, and the general differences and similarities between the
regulatory regimes. See Study at 14-46 (discussing investment
adviser obligations) and 46-83 (discussing broker-dealer
obligations).
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To assist us in our analysis, we request that commenters provide
the following:
1. Data and other information, including surveys of retail
customers, describing the characteristics of retail customers who
invest through a broker-dealer as compared to those who invest on the
basis of advice from an investment adviser as well as retail customer
perceptions of the cost/benefit tradeoffs of each regulatory
regime.\25\ Provide information describing retail customer accounts at
broker-dealers and investment advisers, and the manner in which broker-
dealers and investment advisers provide investment advice (e.g.,
frequency, coverage (i.e., account-by-account or relationship), and
solicited or unsolicited). How do firms that offer both brokerage and
advisory accounts advise retail customers about which type of account
they should open? What are the main characteristics of each type of
account? If possible, associate retail customer demographic information
with account descriptions.
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\25\ See Statement.
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2. Data and other information describing the types and availability
of services (including advice) broker-dealers or investment advisers
offer to retail customers, as well as any observed recent changes in
the types of services offered. Provide information as to why services
offered may differ or have changed. Have differences in the standards
of conduct under the two regulatory regimes contributed to differences
in services offered or any observed changes in services offered? If
possible, differentiate by retail customer demographic information.
3. Data and other information describing the extent to which
different rules apply to similar activities of broker-dealers and
investment advisers, and whether this difference is beneficial, harmful
or neutral from the perspectives of retail customers and firms. Also,
provide data and other information describing the facts and
circumstances under which broker-dealers have fiduciary obligations to
retail customers under applicable law, and how frequently such
fiduciary
[[Page 14853]]
obligations arise. If possible, differentiate by retail customer
demographic information.
4. Data and other information describing the types of securities
broker-dealers or investment advisers offer or recommend to retail
customers. To the extent commenters believe that differences in the
standards of conduct under the two regulatory regimes contribute to
differences in the types of securities offered or recommended, provide
data and other information as to why the types of securities offered or
recommended may differ. If possible, differentiate by retail customer
demographic information.
5. Data and other information describing the cost to broker-dealers
and investment advisers of providing personalized investment advice
about securities to retail customers, as well as the cost to retail
customers themselves of receiving personalized investment advice about
securities. Describe costs in terms of dollars paid and/or time spent.
Do differences in the standards of conduct under the two regulatory
regimes contribute to differences in the cost of providing or receiving
services? If possible, separate costs by service type, and
differentiate by retail customer demographic and account information.
6. Data and other information describing and comparing the security
selections of retail customers who are served by financial
professionals subject to the two existing regulatory regimes.\26\ If
possible, associate retail customer demographic and account information
with security selections, and identify whether initial retail customer
ownership took place prior to opening the account and whether security
selections were solicited or unsolicited.
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\26\ Id.
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7. Data and other information describing the extent to which
broker-dealers and investment advisers engage in principal trading with
retail customers, including data and other information regarding the
types of securities bought and sold on a principal basis, the volume,
and other relevant data points. For each type of security, compare
volume and percentage of trades made on a principal basis against the
volume and percentage of trades made on a riskless principal basis.
Also, provide data and other information on the benefits and costs to
broker-dealers and investment advisers of trading securities on a
principal basis with retail customers, as well as the benefits and
costs to retail customers to buying securities from or selling
securities to a broker-dealer or an investment adviser acting in a
principal capacity. To the extent possible, describe costs and benefits
in terms of dollars paid and/or time spent (e.g., any difference in
price for a customer between a principal trade and a trade executed on
an agency basis). Do differences in the two regulatory regimes
contribute to any differences in the cost of trading securities on a
principal basis? If possible, differentiate by retail customer
demographic and account information.
8. Data and other information describing and analyzing retail
customer returns (net and gross of fees, commissions, or other charges
paid to a broker-dealer or investment adviser) generated under the two
existing regulatory regimes.\27\ If possible, provide security returns,
associate retail customer demographic and account information with
security positions, and identify whether the retail customer held these
security positions prior to account opening and identify whether
security selections were solicited or unsolicited. If security returns
are not available, describe the type of securities held in the account
and total account returns, including changes in account value and
account inflows/outflows.
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\27\ Id.
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9. Data and other information related to the ability of retail
customers to bring claims against their financial professional under
each regulatory regime, with a particular focus on dollar costs to both
firms and retail customers and the results when claims are brought.\28\
We especially welcome the input of persons who have arbitrated,
litigated, or mediated claims (as a retail customer, broker-dealer or
investment adviser), their counsel, and any persons who presided over
such actions. In particular, describe the differences between claims
brought against broker-dealers and investment advisers with respect to
each of the following:
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\28\ Id.
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a. The differences experienced by retail customers, in general,
between bringing a claim against a broker-dealer as compared to
bringing a claim against an investment adviser;
b. any legal or practical barriers to retail customers bringing
claims against broker-dealers or investment advisers;
c. the disposition of claims;
d. the amount of awards, if any;
e. costs related to the claim forum, as it affects retail
customers, firms, and associated persons of such firms;
f. time to resolution of claims;
g. the types of claims brought against broker-dealers (we welcome
examples of mediation, arbitration and litigation claims);
h. the types of claims brought against investment advisers (we
welcome examples of mediation, arbitration and litigation claims);
i. the nature of claims brought against broker-dealers as compared
to the nature of claims brought against investment advisers (e.g.,
breach of fiduciary duty, suitability, breach of contract, tort); and
j. the types of defenses raised by broker-dealers and investment
advisers under each regime.
If possible, differentiate by retail customer demographic and
account information.
10. Data and other information describing the nature and magnitude
of broker-dealer or investment adviser conflicts of interest and the
benefits and costs of these conflicts to retail customers. Also provide
data and other information describing broker-dealer or investment
adviser actions to eliminate, mitigate, or disclose conflicts of
interest. Describe the nature and magnitude of broker-dealer or
investment adviser conflicts of interest with the type and frequency of
activities where conflicts are present, and describe the effect actions
to mitigate conflicts of interest have on firm business and on the
provision of personalized investment advice to retail customers.
11. Data and other information describing broker-dealer or
investment adviser costs from providing mandatory disclosure to retail
customers about products and securities. Describe costs in terms of
dollars and, where cost estimates are not available, estimate time
spent. If possible, differentiate by the form of disclosure (oral or
written) and the amount of information the disclosure presents. Also,
if possible, separate disclosure costs by associated activity.
12. Data and other information describing the effectiveness of
disclosure to inform and protect retail customers from broker-dealer or
investment adviser conflicts of interest. Describe the effectiveness of
disclosure in terms of retail customer comprehension, retail customer
use of disclosure information when making investment decisions, and
retail customer perception of the integrity of the information. Please
provide specific examples. If possible, differentiate by the form of
disclosure (oral or written), the amount of information the disclosure
presents, and retail customer demographic and account information.
Also, if possible, measure disclosure effectiveness by associated
activity.
[[Page 14854]]
13. Identification of differences in state law contributing to
differences in the provision of personalized investment advice to
retail customers. Provide data and other information describing
differences across states with respect to retail customer brokerage or
advisory account characteristics, broker-dealer or investment adviser
services offered and the types of securities they offer or recommend,
and the cost of providing services to retail customers. Do differences
in state law contribute to differences in the recovery of claimants? Do
differences in state law contribute to differences in the mitigation or
elimination of conflicts of interest? Provide information describing
why. If possible, associate retail customer demographic information
with account descriptions.
14. Data and other information describing the extent to which
retail customers are confused about the regulatory status of the person
from whom they receive financial services (i.e., whether the party is a
broker-dealer or an investment adviser). Provide data and other
information describing whether retail customers are confused about the
standard of conduct the person providing them those services owes to
them. Describe the types of services and/or situations that increase or
decrease retail customers' confusion and provide information describing
why. Describe the types of obligations about which retail customers are
confused and provide information describing why.
Provide explanations describing why responses to particular
questions are not possible. Are there operational or cost constraints
that make the data and other information unavailable? If so, please
explain what they are. Also provide data and other information on other
factors important in describing the current market for personalized
investment advice that may aid or guide us in future analysis.
III. Request for Data and Other Information Relating to a Uniform
Fiduciary Standard of Conduct and Alternative Approaches
We discuss below potential alternative approaches to establishing a
uniform fiduciary standard of conduct for broker-dealers and investment
advisers and request data and other information with respect to those
approaches and their potential implications for the marketplace.\29\ To
be clear, the discussion of these potential approaches--including the
identification of particular assumptions or alternatives--does not
suggest our policy view or the ultimate direction of any proposed
action by us. Furthermore, the approaches presented here are non-
exclusive. As discussed above, this description of potential approaches
is instead intended to (1) assist commenters in providing more concrete
empirical data and other information and more precise comment in
response to this request and (2) assist us in more readily comparing,
reproducing, and otherwise analyzing data and other information
provided by commenters.
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\29\ In Part IV, we discuss certain possible approaches for
harmonizing certain other aspects of the regulation of broker-
dealers and investment advisers.
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We recognize that commenters may be able to provide additional data
and other information that may be helpful to us under assumptions and
alternatives that are different from, or in addition to, those
presented under the various approaches described below. We invite
commenters to explain clearly the different or additional assumptions
and alternatives they provide, address why such assumptions and
alternatives are appropriate, and compare and contrast results obtained
under such assumptions and alternatives with results obtained under the
assumptions or alternatives specified in this request.
We intend to use the data and other information provided to inform
us about the current market for personalized investment advice about
securities and how different approaches to establishing a uniform
fiduciary standard of conduct on broker-dealers and investment advisers
may impact retail customers, investment advisers and broker-dealers.
A. Initial Clarification and Assumptions
As an initial matter, to provide clarity to commenters and
establish a common baseline of assumptions, we indicate that commenters
should make the assumptions set forth below in considering our
subsequent description of a possible uniform fiduciary standard of
conduct when a broker-dealer or investment adviser provides
personalized investment advice to a retail customer. However, as
described above in the introduction to this Part III, the
identification of particular assumptions does not suggest our policy
view or the ultimate direction of any proposed action by us. We invite
comment based on other assumptions chosen by commenters, and we invite
comparisons between analyses made under assumptions chosen by
commenters and analyses made under the assumptions--particularly
alternatives to Assumption 1 and Assumption 8 below--we have set forth
below.
1. Assume that the term ``personalized investment advice about
securities'' would include a ``recommendation,'' as interpreted under
existing broker-dealer regulation,\30\ and would include any other
actions or communications that would be considered investment advice
about securities under the Advisers Act (such as comparisons of
securities or asset allocation strategies). It would not include
``impersonal investment advice'' as that term is used for purposes of
the Advisers Act.\31\ The term ``personalized investment advice'' would
also not include general investor educational tools, provided those
tools do not constitute a recommendation under current law.\32\
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\30\ See Study at 124-125 (staff's discussion of what
constitutes a ``recommendation'' under the broker-dealer regulatory
regime).
\31\ We have defined ``impersonal investment advice'' for
certain purposes under the Advisers Act to mean ``investment
advisory services provided by means of written material or oral
statements that do not purport to meet the objectives or needs of
specific individuals or accounts.'' 17 CFR 275.203A-3(a)(3)(ii). See
also 17 CFR 275.206(3)-1; Study at 123 (staff's discussion of what
constitutes ``impersonal investment advice'').
\32\ See Study at 125 (staff's discussion of communications that
generally would not constitute a ``recommendation'' under existing
broker-dealer regulation).
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2. Assume that the term ``retail customer'' would have the same
meaning as in Section 913 of the Dodd-Frank Act, which is ``a natural
person, or the legal representative of such natural person, who (1)
receives personalized investment advice about securities from a broker
or dealer or investment adviser; and (2) uses such advice primarily for
personal, family, or household purposes.''\33\
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\33\ Sec. 913, Public Law 111-203, 124 Stat. 1376; 15 U.S.C.
80b-11(g)(2). See also supra note 1.
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3. Assume that any action would apply to all SEC-registered broker-
dealers and SEC-registered investment advisers. To the extent
commenters are of the view that the duty should be limited to a
particular subset of SEC-registered broker-dealers or SEC-registered
investment advisers or expanded to include all broker-dealers or
investment advisers, commenters should explain how and why it should be
limited or expanded, and include any relevant data and other
information to support such an application.
4. Assume that the uniform fiduciary standard of conduct would be
designed to accommodate different business models and fee structures of
firms, and would permit broker-dealers to continue to receive
commissions; firms would not be required to charge an asset-based fee.
As provided in Section 913, ``[t]he receipt of compensation based on
commissions, fees or other standard
[[Page 14855]]
compensation for the sale of securities, for example, would not, in and
of itself, be considered a violation'' of the uniform fiduciary
standard of conduct.\34\ Broker-dealers also would continue to be
permitted to engaged in, and receive compensation from, principal
trades. To satisfy the uniform fiduciary standard of conduct, however,
assume that at a minimum a broker-dealer or investment adviser would
need to disclose material conflicts of interest, if any, presented by
its compensation structure.\35\
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\34\ See 15 U.S.C. 78o(k)(1); 15 U.S.C. 80b-11(g)(1).
We also note that nothing in Section 206(1) and 206(2) of the
Advisers Act prohibits the receipt of transaction-based
compensation, such as commissions. A person engaged in the business
of effecting transactions in securities for the account of others,
would however, absent an available exemption, be required to
register as a broker-dealer. See Exchange Act Sections 3(a)(4) and
15(a); 15 U.S.C. 78c(a)(4) and 78o(a). See also SEC v. Hansen, [1984
Transfer Binder] Fed. Sec. L. Rep. (CCH) ] 91,426 (S.D.N.Y. 1984)
(stating that receiving transaction-based compensation is among the
activities that indicate a person may be acting as a broker); Mutual
Fund Distribution Fees; Confirmations, Exchange Act Release No.
62544 (July 21, 2010) (proposing rules governing ongoing mutual fund
asset-based sales charges), n. 168 (``As a form of deferred sales
load, all payments of ongoing sales charges to intermediaries would
constitute transaction-based compensation. Intermediaries receiving
those payments thus would need to register as broker-dealers under
Section 15 of the Exchange Act unless they can avail themselves of
an exception or exemption from registration. Marketing and service
fees paid to an intermediary may similarly require the intermediary
to register under the Exchange Act.'').
\35\ See discussion infra Part III.B.1.
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5. Assume that the uniform fiduciary standard of conduct would not
generally require a broker-dealer or investment adviser to either (i)
have a continuing duty of care or loyalty to a retail customer after
providing him or her personalized investment advice about securities,
\36\ or (ii) provide services to a retail customer beyond those agreed
to between the retail customer and the broker-dealer or investment
adviser. Assume that the question of whether a broker-dealer or
investment adviser might have a continuing duty, as well as the nature
and scope of such duty, would depend on the contractual or other
arrangement or understanding between the retail customer and the
broker-dealer or investment adviser, including the totality of the
circumstances of the relationship and course of dealing between the
customer and the firm, including but not limited to contractual
provisions, disclosure and marketing documents, and reasonable customer
expectations arising from the firm's course of conduct.\37\ Similarly,
the uniform fiduciary standard of conduct would apply within the
context of the scope of services agreed to between the customer and the
broker-dealer or investment adviser, and would not generally require
the broker-dealer or investment adviser to provide services beyond
those agreed to through a contractual or other arrangement or
understanding with the retail customer.
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\36\ See 15 U.S.C. 78o(k)(1) (``Nothing in this section
[authorizing a uniform standard of conduct for the provision of
personalized investment advice] shall require a broker or dealer or
registered representative to have a continuing duty of care or
loyalty to the customer after providing personalized investment
advice about securities.'').
\37\ We understand that market participants generally have taken
the view that the extent to which a continuing duty of loyalty or
care exists under the Advisers Act depends on the scope of the
relationship with the customer. They believe, for example, that
investment advisers who act as financial planners generally would
not have a continuing duty to a customer after providing the
financial plan.
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6. As discussed below, assume that the offering or recommending of
only proprietary or a limited range of products would not, in and of
itself, be considered a violation of the uniform fiduciary standard of
conduct.\38\
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\38\ See 15 U.S.C. 78o(k)(2) (``The sale of only proprietary or
other limited range of products by a broker or dealer shall not, in
and of itself, be considered a violation of the [uniform standard of
conduct for the provision of personalized investment advice.]'').
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7. Assume that Section 206(3) and Section 206(4) of the Advisers
Act and the rules thereunder would continue to apply to investment
advisers, and would not apply to broker-dealers.\39\ Assume that to
satisfy its obligations under the uniform fiduciary standard of
conduct, however, a broker-dealer would need to disclose any material
conflicts of interest associated with its principal trading practices.
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\39\ Section 206(4) of the Advisers Act makes it unlawful for an
investment adviser to ``engage in any act, practice, or course of
business which is fraudulent, deceptive, or manipulative'' and
authorizes the Commission ``by rules and regulations [to] define,
and prescribe means reasonably designed to prevent, such acts,
practices, and courses of business as are fraudulent, deceptive, or
manipulative.'' See also infra the discussion of principal trading
and the inapplicability of Section 206(3) of the Advisers Act in
Part III.B.1.
We have authority to adopt rules for broker-dealers that are
substantially similar to those adopted under Sections 206(3) and
206(4) of the Advisers Act. For purposes of our request for
information and data about a uniform fiduciary standard of conduct,
we request that commenters assume that such rules will not be
incorporated into such a standard of conduct. However, commenters
may wish to express their views on whether the Commission should
engage in rulemaking to impose such rules on broker-dealers as part
of harmonization of the regulatory obligations of broker-dealers and
investment advisers. See discussion infra Part IV.
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8. Assume that existing applicable law and guidance governing
broker-dealers, including SRO rules and guidance, would continue to
apply to broker-dealers.
B. Discussion of a Possible Uniform Fiduciary Standard
Pursuant to Section 913 of the Dodd-Frank Act, ``[t]he Commission
may promulgate rules to provide that the standard of conduct for all
brokers, dealers, and investment advisers, when providing personalized
investment advice about securities to retail customers * * * shall be
to act in the best interest of the customer without regard to the
financial or other interest of the broker, dealer, or investment
adviser providing the advice.'' \40\ We have not yet determined whether
to exercise this authority. Section 913 also provides that any standard
of conduct we adopt shall be no less stringent than the standard
applicable to investment advisers under Sections 206(1) and 206(2) of
the Advisers Act.\41\ The Supreme Court has construed Advisers Act
Sections 206(1) and 206(2) as requiring an investment adviser to fully
disclose to its clients all material information that is intended ``to
eliminate, or at least expose, all conflicts of interest which might
incline an investment adviser--consciously or unconsciously--to render
advice which was not disinterested.'' \42\
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\40\ 15 U.S.C. 80b-11(g)(1); 15 U.S.C. 78o(k)(1).
\41\ Id.
\42\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
194 (1963).
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The Study recommended that we should engage in rulemaking to
implement the uniform fiduciary standard described in Section 913 of
the Dodd-Frank Act. The staff recommended that, in implementing the
uniform fiduciary standard, we should address both components of the
uniform fiduciary standard: a duty of loyalty and a duty of care. The
staff also supported extending the existing guidance and precedent
under the Advisers Act regarding fiduciary duty, which has developed
primarily through Commission and staff interpretive pronouncements
under the antifraud provisions of the Advisers Act, as well as through
case law and numerous enforcement actions, to broker-dealers, where
similar facts and circumstances would make the guidance and precedent
relevant and justify a similar outcome.\43\
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\43\ As discussed in more detail below, the Commission
acknowledges that existing guidance and precedent under the Advisers
Act regarding fiduciary duty turn on the specific facts and
circumstances, including the types of services provided and
disclosures made. Accordingly, the existing guidance and precedent
may not directly apply to broker-dealers depending on the facts and
circumstances.
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[[Page 14856]]
We request data and other information on the benefits and costs of
implementing the uniform fiduciary standard (as described below),
entailing two key elements: a duty of loyalty and a duty of care. Our
description below of a potential uniform fiduciary standard is only one
example of how we could implement a uniform fiduciary standard designed
to require broker-dealers and investment advisers to provide advice
that is in the best interest of the customer. The discussion of the
uniform fiduciary standard described below and the potential
alternative approaches does not suggest our policy view or the ultimate
direction of any proposed action by us. To obtain the most comparable
and useful data and other information on a uniform fiduciary standard,
however, we ask commenters to consider the uniform fiduciary standard
as described below. We also discuss certain potential alternative
approaches in the discussion below and request comment on those
alternatives.
We recognize, among other things, that the list of potential
options discussed below--including the uniform fiduciary standard of
conduct, potential alternative approaches to the uniform fiduciary
standard of conduct, and taking no action at this time--is not
exhaustive, and that commenters may formulate additional alternative
approaches. To the extent commenters are of the view that we should
consider additional alternative approaches, we request they explain
those approaches, address their reasons for recommending such
approaches, and compare such approaches to the ones specified in detail
below.
1. Uniform Fiduciary Standard of Conduct--the Duty of Loyalty
The duty of loyalty is a critical component of a fiduciary duty. As
noted above, Dodd-Frank Section 913(g) addresses the duty of loyalty by
providing: ``[i]n accordance with such rules [that the Commission may
promulgate with respect to the uniform fiduciary standard] * * * any
material conflicts of interest shall be disclosed and may be consented
to by the customer.'' \44\ The uniform fiduciary standard would be
designed to promote advice that is in the best interest of a retail
customer by, at a minimum, requiring an investment adviser or a broker-
dealer providing personalized investment advice to the customer to
fulfill its duty of loyalty. This would be accomplished by eliminating
its material conflicts of interest, or providing full and fair
disclosure to retail customers about those conflict of interest.\45\
Commenters should assume that we would provide specific detail or
guidance, summarized below, about complying with the duty of loyalty
component of the uniform fiduciary duty. As described above in the
introduction to this Part III, the identification of particular
assumptions does not suggest our policy view or the ultimate direction
of any proposed action by us. We invite comment on other assumptions
and comparisons between analyses made under such other assumptions and
analyses made under the assumptions set forth below.
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\44\ 15 U.S.C. 80b-11(g)(1); 15 U.S.C. 78o(k)(1).
\45\ The staff made a number of recommendations in the Study for
the Commission to consider in implementing a duty of loyalty. First,
the Study recommended that we should facilitate the provision of
uniform, simple and clear disclosures to retail customers about the
terms of their relationships with broker-dealers and investment
advisers, including any material conflicts of interests. The Study
identified a number of potential disclosures that the Commission
should consider (e.g., a general relationship guide akin to the new
Part 2A of Form ADV, the form investment advisers use to register
with the Commission and states, which is provided to advisory
clients). See Study at 114-117. Second, the Study recommended that
we should consider whether rulemaking would be appropriate to
prohibit certain conflicts, to require firms to mitigate conflicts
through specific action, or to impose specific disclosure and
consent requirements. Id. Third, the Study recommended that we
should address through guidance and/or rulemaking how broker-dealers
should fulfill the uniform fiduciary standard when engaging in
principal trading. Id. at 118-120.
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1. Assume that any rule under consideration would expressly impose
certain disclosure requirements. Assume that each broker-dealer and
investment adviser that provides personalized investment advice about
securities to a retail customer would be required to provide the
following to that retail customer:
a. Disclosure of all material conflicts of interest the broker-
dealer or investment adviser has with that retail customer. This
requirement would reflect an overarching, general obligation to
disclose all such conflicts of interest. Depending on the nature of the
conflict and unless otherwise provided, this disclosure largely could
be made through the general relationship guide described below.
b. Disclosure in the form of a general relationship guide similar
to Form ADV Part 2A, to be delivered at the time of entry into a retail
customer relationship.\46\ The relationship guide would contain a
description of, among other things, the firm's services, fees, and the
scope of its services with the retail customer, including: (i) Whether
advice and related duties are limited in time or are ongoing, or are
otherwise limited in scope (e.g., limited to certain accounts or
transactions); (ii) whether the broker-dealer or investment adviser
only offers or recommends proprietary or other limited ranges of
products; (iii) whether, and if so the circumstances in which, the
broker-dealer or investment adviser will seek to engage in principal
trades with a retail customer. It also could include disclosure of
other material conflicts of interest, such as conflicts of interest
presented by compensation structures.\47\
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\46\ We note that FINRA has requested comment on a concept
proposal to require the provision of a disclosure statement for
retail customers at or before commencing a business relationship
that would include many items of information analogous to what is
required in Form ADV Part 2. FINRA Regulatory Notice 10-54,
``Disclosure of Services, Conflicts and Duties'' (Oct. 2010).
Nothing in this request for information and data suggests that FINRA
or any other regulatory body could or could not, or should or should
not adopt rules or requirements that it determines are appropriate
and that meet applicable legal standards.
\47\ A general relationship guide could also include other
disclosures, such as a firm's disciplinary history.
---------------------------------------------------------------------------
c. Oral or written disclosure at the time personalized investment
advice is provided of any new material conflicts of interest or any
material change of an existing conflict.
2. Assume that any rule under consideration would treat conflicts
of interest arising from principal trades the same as other conflicts
of interest. Assume that such a rule would make clear that it would not
incorporate the transaction-by-transaction disclosure and consent
requirements of Section 206(3) of the Advisers Act for principal
trading.\48\ At a minimum, as with other conflicts of interest, the
broker-dealer would be required to disclose material conflicts of
interest arising from principal trades with retail customers.\49\
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\48\ Assume that the rule would not relieve an investment
adviser from its obligations under Advisers Act Section 206(3). We
note that we have the authority to apply similar requirements to
broker-dealers. Also assume that the rule would not relieve an
investment adviser who is also registered as a broker-dealer from
its obligations to comply with Advisers Act Section 206(3) or the
rules thereunder. See 17 CFR 275.206(3)-3T.
As stated above, we request that, for purposes of our request
for information and data about a uniform fiduciary standard of
conduct, commenters assume that we will not incorporate these
obligations into the uniform fiduciary standard of conduct. However,
commenters may wish to express their views, on whether the
Commission should engage in rulemaking to impose such rules on
broker-dealers as part of harmonization of the regulatory
obligations of broker-dealers and investment advisers. See
discussion infra Part IV.
\49\ SRO rules currently impose requirements on broker-dealers
when broker-dealers engage in principal trading. See, e.g., NASD
Rule 2440 (Fair Prices and Commissions); IM-2440-1 (Mark-Up Policy);
IM-2440-2 (Mark-Up Policy for Debt Securities); NASD Rule 2310
(Suitability) (effective until July 9, 2012, when replaced by FINRA
Rule 2111); NASD Rule 3010 (Supervision); NASD Rule 3012
(Supervisory Control System). As noted above, these requirements
would continue to apply to a broker-dealer under a uniform fiduciary
standard of conduct.
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[[Page 14857]]
3. Assume that the rule would prohibit certain sales contests. The
rule would prohibit the receipt or payment of non-cash compensation
(e.g., trips and prizes) in connection with the provision of
personalized investment advice about the purchase of securities.
2. Uniform Fiduciary Standard of Conduct--the Duty of Care
The duty of care is another critical component of the uniform
fiduciary standard. We would specify, through the duty of care, certain
minimum professional obligations of broker-dealers and investment
advisers,\50\ which would be designed to promote advice that is in the
best interests of the retail customer. Commenters should assume, for
purposes of this request for data and other information, that we would
implement the duty of care by imposing on a broker-dealer or investment
adviser, when providing personalized advice to a retail customer about
securities, the uniform obligations described below. As described above
in the introduction to this Part III, the identification of particular
assumptions does not suggest our policy view or the ultimate direction
of any proposed action by us. We invite comment based on other
assumptions chosen by commenters, and we invite comparisons between
analyses made under assumptions chosen by commenters and analyses made
under the assumptions we have set forth below.
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\50\ The staff stated in the Study that the Commission could
articulate and harmonize such professional standards by referring
to, and expanding upon, as appropriate, the explicit minimum
standards of conduct relating to the duty of care currently
applicable to broker-dealers (e.g., suitability (including product-
specific suitability), best execution, and fair pricing and
compensation requirements) under applicable rules. See Study at 50-
53.
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1. Suitability obligations: A duty to have a reasonable basis to
believe that its securities and investment strategy recommendations are
suitable for at least some customer(s) as well as for the specific
retail customer to whom it makes the recommendation in light of the
retail customer's financial needs, objectives and circumstances; \51\
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\51\ See Study at 27-28 and 61-64 (discussing investment adviser
and broker-dealer suitability obligations, respectively).
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2. Product-specific requirements: Specific disclosure, due
diligence, or suitability requirements for certain securities products
recommended (such as penny stocks, options, debt securities and bond
funds, municipal securities, mutual fund share classes, interests in
hedge funds and structured products);\52\
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\52\ See id. at 65-66 (discussing relevant rules imposing
specific disclosure, diligence and suitability requirements for
certain securities products).
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3. Duty of best execution: A duty on a broker-dealer and an
investment adviser (where the investment adviser has the responsibility
to select broker-dealers to execute client trades) to seek to execute
customer trades on the most favorable terms reasonably available under
the circumstances; \53\ and
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\53\ See id. at 28-29 and 69-70 (describing investment adviser
and broker-dealer duties of best execution).
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4. Fair and reasonable compensation: A requirement that broker-
dealers and investment advisers receive compensation for services that
is fair and reasonable, taking into consideration all relevant
circumstances.\54\
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\54\ See id. at 66-69 (describing broker-dealer obligations to
charge fair prices, commissions, and other charges and fees).
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3. Uniform Fiduciary Standard of Conduct--Application of Prior Guidance
and Precedent Regarding Investment Adviser Fiduciary Duty
In the interests of increasing investor protection and reducing
investor confusion, the staff recommended in the Study that the uniform
fiduciary standard be no less stringent than the existing fiduciary
standard for investment advisers under Advisers Act Sections 206(1) and
206(2).\55\ Accordingly, the staff recommended that existing guidance
and precedent under the Advisers Act regarding fiduciary duty should
continue to apply to investment advisers and be extended to broker-
dealers, as applicable, under a uniform fiduciary standard of conduct.
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\55\ As explained above, guidance and precedent under Sections
206(3) and 206(4) of the Advisers Act, and the rules adopted under
those sections, would not be part of the uniform fiduciary standard
of conduct.
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Application of this guidance and precedent turns on the specific
facts and circumstances, including the types of services provided and
disclosures made. We understand, accordingly, that existing guidance
and precedent may not directly apply to broker-dealers depending on the
facts and circumstances. Therefore, to aid commenters, we have
identified below certain fiduciary principles that commenters should
assume would continue to apply to investment advisers and be extended
to broker-dealers. We also request commenters to identify specific
citations to any case law and enforcement actions and other guidance
under the Advisers Act regarding the fiduciary duty that they believe
should or should not apply to broker-dealers when providing
personalized investment advice about securities to retail customers.
For purposes of this request for data and other information,
commenters should make the assumptions below regarding the application
of prior guidance and precedent under a uniform fiduciary standard of
conduct. As described above in the introduction to this Part III, the
identification of particular assumptions does not suggest our policy
view or the ultimate direction of any proposed action by us. We invite
comment based on other assumptions chosen by commenters, and we invite
comparisons between analyses made under assumptions chosen by
commenters and analyses made under the assumptions we have set forth
below.
1. Allocation of investment opportunities: A fiduciary's duty of
loyalty generally would require a firm to disclose to a retail customer
how it would allocate investment opportunities among its customers,\56\
and between customers and the firm's own account; \57\ for example,
this disclosure could include, among other things, the firm's method of
allocating shares of initial public offerings, as well as its method
(e.g., pro rata, ``first in, first out'') of allocating out of its
principal account to its customers when agency orders are placed on a
riskless principal basis.
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\56\ The Commission has brought numerous enforcement actions
alleging that investment advisers unfairly allocated client trades
to preferred clients without making adequate disclosure. See, e.g.,
Alpine Woods Capital Investors, LLC and Samuel A. Lieber, Admin.
Proc. File No. 3-14233 (Feb. 7, 2011) (finding the investment
adviser violated Advisers Act Section 206(2) when it
disproportionately allocated shares from an initial public offering
to the advantage of the firm's two smallest mutual funds); Nevis
Capital Mgmt., LLC, Investment Advisers Act Release No. 2214 (Feb.
9, 2004) (settled order); The Dreyfus Corp., et al., Investment
Advisers Act Release No. 1870 (May 10, 2000) (settled order);
Account Mgmt. Corp., Investment Advisers Act Release No. 1529 (Sept.
29, 1995) (settled order).
\57\ The Commission has brought numerous enforcement actions
alleging that investment advisers unfairly allocated trades to their
own accounts and allocated less favorable or unprofitable trades to
their clients' accounts. See, e.g., Nicholas-Applegate Capital
Mgmt., Investment Advisers Act Release No. 1741 (Aug. 12, 1998)
(settled order); Timothy J. Lyons, Investment Advisers Act Release
No. 1882 (June 20, 2000) (settled order); SEC v. Lyons, 57 SE.C. 99
(2003); SEC v. Alan Brian Bond, et al., Litigation Release No. 18923
(Civil Action No. 99-12092 (S.D.N.Y.) (Oct. 7, 2004).
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2. Aggregation of orders: A firm may aggregate or ``bunch'' orders
on behalf of two or more of its retail customers, so long as the firm
does not favor one
[[Page 14858]]
customer over another.\58\ A firm would need to disclose whether and
under what conditions it aggregates orders; \59\ if the firm does not
aggregate orders when it has the opportunity to do so, the firm would
need to explain its practice and describe the costs to customers of not
aggregating.\60\
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\58\ The staff takes the position that an investment adviser,
when directing orders for the purchase or sale of securities, may
aggregate or ``bunch'' those orders on behalf of two or more of its
accounts, so long as the bunching is done for the purpose of
achieving best execution, and no customer is disadvantaged or
advantaged by the bundling. See SMC Capital, Inc., SEC No-Action
Letter (Sept. 5, 1995).
\59\ The staff understands that, consistent with applicable law,
broker-dealers currently only aggregate orders in limited
circumstances, such as when orders are received outside of normal
trading hours and aggregated in anticipation of execution when the
market re-opens, or when the broker-dealer has discretion over the
trade. Similarly, the staff recognizes that aggregation of orders
may not occur frequently with regard to non-discretionary advisory
accounts.
\60\ See Item 12 of Form ADV Part 2A.
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C. Alternative Approaches to the Uniform Fiduciary Standard of Conduct
We identify below alternative approaches to the uniform fiduciary
standard discussed above. In considering the alternatives, it would be
helpful to obtain information about whether and, if so, how each
alternative meets the goals of enhancing retail customer protections
and decreasing retail customers' confusion about the standard of
conduct owed to them when their financial professional provides them
personalized investment advice. It would also be helpful to obtain
information about the relative costs and benefits of these
alternatives, including the extent to which one alternative may provide
(1) greater benefits for the same or lower cost than other alternatives
or (2) lower benefits for the same or higher cost than other
alternatives. The identification of particular alternatives does not
suggest our policy view or the ultimate direction of any proposed
action by us.
Keeping in mind these goals, we request comment on the following
alternative approaches, including the costs and benefits of each
approach, as well as other approaches. We could:
1. Apply a uniform requirement for broker-dealers and investment
advisers to provide disclosure about (a) key facets of the services
they offer and the types of products or services they offer or have
available to recommend; and (b) material conflicts they may have with
retail customers, without imposing a uniform fiduciary standard of
conduct.
2. Apply the uniform fiduciary standard of conduct discussed above
on broker-dealers and investment advisers, but without extending to
broker-dealers the existing guidance and precedent under the Advisers
Act regarding fiduciary duty.\61\ The existing guidance and precedent
under the Advisers Act regarding fiduciary duty would continue to apply
to investment advisers.
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\61\ The Securities Industry and Financial Markets Association
suggested this approach. See SIFMA Letter, supra note 17.
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3. Without modifying the regulation of investment advisers, apply
the uniform fiduciary standard discussed above, or parts thereof, to
broker-dealers. This ``broker-dealer-only'' standard could involve
establishing a ``best interest'' standard of conduct for broker-
dealers, which would be no less stringent than that currently applied
to investment advisers under Advisers Act Sections 206(1) and 206(2),
when they provide personalized investment advice about securities to
retail customers.
4. Without modifying the regulation of broker-dealers, specify
certain minimum professional obligations under an investment adviser's
duty of care (which are currently not specified by rule). As discussed
above, any rules or guidance would take into account Advisers Act
fiduciary principles, such as the duty to provide suitable investment
advice (e.g., with respect to specific recommendations and the client's
portfolio as a whole) and to seek best execution where the adviser has
the responsibility to select broker-dealers to execute client trades.
These requirements could be similar to those rules currently applicable
to broker-dealers, as described further in the Study.\62\
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\62\ For a more detailed description of such requirements, see
the Study at 61-70.
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5. Consider following models set by regulators in other countries.
For instance, the United Kingdom's Financial Services Authority (FSA)
requires persons providing personalized investment advice to a retail
client to act in the client's best interests, and has set limits on how
investment advisers charge for their services, including prohibiting
(a) the receipt of ongoing charges unless there are ongoing services,
and (b) the receipt of commissions from those providing the investment
advice.\63\ Similarly, the Treasury of Australia imposed a best
interest obligation on persons providing personal advice that would (a)
require the provider of the advice to place a retail client's interests
before its own,\64\ and (b) prohibit the receipt of ``conflicted''
remuneration, such as commission payments relating to the provision of
advice.\65\ Further, the European Securities and Markets Authority
(ESMA) published guidelines to clarify the application of certain
aspects of its current Markets in Financial Instruments Directive
(MiFID) suitability requirements (arising from both MiFID and the MiFID
Implementing Directive).\66\
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\63\ See Financial Services Authority Handbook, Conduct of
Business Sourcebook (``COBS''), 2.1.1, available at http://fsahandbook.info/FSA/html/handbook/COBS/2/1 (FSA's ``client best
interest rule''). See also COBS, 9.2.1(1), (2); COBS, 9.2.2
(requiring that a firm's recommendations be suitable and reasonable
based on the client's risk profile). Effective in 2012, the FSA will
require firms to disclose to retail clients the type (either
``independent'' or ``restricted'') and breadth of advice being
offered (e.g., limited to certain products or a comprehensive, fair
and unbiased analysis of the relevant market). See COBS, 6.2A.5R,
6.2A.6R, available at http://fsahandbook.info/FSA/html/handbook/COBS. The Adviser Charging rules, also going into effect in 2012,
will prohibit receipt of any remuneration for advice that is not
disclosed and agreed upon in advance of the recommendation. See
COBS, 6.1A.
\64\ See The Corporations Amendment (Further Future of Financial
Advice Measures) Act 2012, (``Financial Advice Measures''),
available at http://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r4739_aspassed/toc_pdf/11270b01.pdf;fileType=application%2Fpdf. See also Australian
Securities & Investments Commission, Regulatory Guide 175:
Licensing: Financial Product Advisers--Conduct and Disclosure 15
(2011), available at http://www.asic.gov.au/asic/pdflib.nsf/
LookupByFileName/rg175-010411.pdf/$file/rg175-010411.pdf (discussing
the implied warranty, under the Australian Securities and
Investments Commission Act 2001, to render advice through ``due care
and skill'').
\65\ See Financial Advice Measures.
\66\ See Guidelines on certain aspects of the MiFID suitability
requirements, ESMA, 2012, 387 (July 6, 2012), available at http://www.esma.europa.eu/system/files/2012-387.pdf.
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As described above in Part III.B, we invite comment on other
potential alternative approaches not specified in this request for data
and other information and comparisons between those alternative
approaches and the potential uniform fiduciary standard of conduct and
alternatives we describe above.
D. Preserving Current Standard of Conduct Obligations
Consistent with our discretionary authority under Section 913, we
could also determine to take no further action at this time with
respect to the standards of conduct applicable to broker-dealers and
investment advisers; existing regulatory requirements would continue to
apply. We request data and other information relating to the current
market for personalized investment advice in Part II above. It
generally would be helpful to obtain information about how taking no
action would compare to a uniform fiduciary standard
[[Page 14859]]
of conduct and the alternative approaches described above. In
particular, it would be helpful to obtain information about the costs
and benefits of the current regulatory regime as compared to the
uniform fiduciary standard of conduct and the alternative approaches
described above. Such comparisons would be particularly helpful as
commenters consider providing data and other information in connection
with the requests specified in Part III.E below.
E. Request for Data and Other Information Relating to Changes in the
Marketplace for Personalized Investment Advice Resulting from the
Uniform Fiduciary Standard of Conduct and Alternative Approaches
The Commission requests the following data and other information
relating to changes in the marketplace for personalized investment
advice for retail customers that might occur as a result of
implementing the uniform fiduciary standard of conduct and the
alternative approaches described above. As noted above, in providing
this data and other information, the Commission believes it would be
useful to also obtain information about the benefits and costs of
continuing the current regulatory regime, as requested in Part II
above, as a baseline for comparing the uniform fiduciary standard of
conduct and the alternative approaches. Accordingly, to the extent
applicable, the Commission requests commenters to provide such
comparisons. As in Part II, many of the requests ask commenters to
provide data and other information describing retail customer
demographics and accounts; broker-dealer or investment adviser services
offered; financial securities; and the claims of retail customers in
dispute resolution. We request commenters to refer to the Appendix for
the specific characteristics of each of these topics that are important
to include when submitting data and other information. We also request
commenters refer to other guidelines in the Appendix, particularly the
request to provide background information and documentation to support
any economic analysis.
1. Commenters have highlighted several activities of broker-dealers
and investment advisers that are most likely to be impacted by a
uniform fiduciary standard for the provision of personalized investment
advice about securities to retail customers: \67\
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\67\ The inclusion of activities in this list does not
necessarily reflect the Commission's belief that these activities
will be impacted by a uniform fiduciary standard, see the discussion
of clarifications and assumptions in the introductions to Part III
and Part III.A.
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Recommending proprietary products and products of
affiliates;
Engaging in principal trades with respect to a recommended
security (e.g., fixed income products);
Recommending a limited range of products and/or services;
Recommending a security underwritten by the firm or a
broker-dealer affiliate, including initial public offerings;
Allocating investment opportunities among retail customers
(e.g., IPO allocation);
Advising on a trading strategy involving concentrated
positions;
Receiving third-party compensation in connection with
securities transactions or distributions (e.g., sales loads, ongoing
asset-based fees, or revenue sharing); and
Providing ongoing, episodic or one-time advice.
a. Provide comment on this list of activities. Does this list
capture the activities of broker-dealers and investment advisers that
would be most impacted by a uniform fiduciary standard of conduct when
providing personalized investment advice about securities to retail
customers?
b. Provide data and other information describing the likely
benefits and costs for firms and retail customers from firms engaging
in these activities under the uniform fiduciary standard of conduct and
each of the alternative approaches discussed above. In particular,
describe the cost to broker-dealers and investment advisers in terms of
dollars and time spent from providing these activities to retail
customers under the uniform fiduciary standard and each of the
alternative approaches. Also provide data and other information
describing the benefits and costs to firms and retail customers likely
to result from voluntary actions firms may take that are not
necessarily mandated by the relevant standard. If possible, separate
costs by service type, and differentiate by retail customer demographic
and account information.
c. Provide data and other information related to the nature and
magnitude of conflicts of interest when firms engage in these
activities under the uniform fiduciary standard and each of the
alternative approaches discussed above. How would the uniform fiduciary
standard or each of the alternative approaches increase or decrease
broker-dealer or investment adviser conflicts of interest?
2. Provide data and other information describing the types and
availability of services (including advice) and securities that broker-
dealers or investment advisers would offer or recommend to retail
customers under the uniform fiduciary standard and each of the
alternative approaches discussed above. Would the application of a
particular approach discussed above require a firm, or give a firm an
incentive, to modify or eliminate current business practices? What
would be the impact or potential impact of each approach discussed
above on retail customer cost and access to personalized investment
advice and to security offerings? How could such impact or costs be
mitigated? Provide data and other information describing why the
business practices would be so modified or eliminated, and whether
retail customer access would change. Indicate whether business
practices are transaction-specific, account-specific, customer-
specific, or firm-wide. If possible, separate costs by service type and
differentiate by retail customer demographic and account information.
3. Provide data and other information describing the security
selections of retail customers under the uniform fiduciary standard and
each of the alternative approaches discussed above. If possible,
associate retail customer demographic and account information with
security selections.
4. Provide data and other information related to the ability of
retail customers to bring claims against their financial professional
under the uniform fiduciary standard and each of the alternative
approaches discussed above, with a particular focus on alternative
forums and dollar costs to both firms and retail customers and the
results when claims are brought. Describe disposition of claims, costs
related to claim forum, time to resolution, and awards if any. If
possible, differentiate by retail customer demographic and account
information.\68\
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\68\ See supra Item 9(a)-(j) in Part II of this request for
information and data.
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5. Provide information, data and comment on the extent to which the
uniform fiduciary standard and each of the alternative approaches
discussed above affect investor protection and confusion investors have
about the standard of conduct applicable to their financial
professionals when providing personalized investment advice about
securities.\69\
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\69\ See supra note 2.
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6. Provide information, data and comment on the costs and benefits
to investment advisers and broker-dealers associated with implementing
the uniform fiduciary standard and each of
[[Page 14860]]
the alternative approaches discussed above. Discuss any changes
investment advisers and broker-dealers would need to make to, among
others, their customer documentation, internal controls, and training
programs, as well as other changes they would need to make, and why.
7. Provide data and other information describing to what extent
firms would rely on disclosure to comply with the uniform fiduciary
standard and each of the alternative approaches detailed above. How
would retail customers be expected to react to changes in practice and
changes in disclosure? How do retail customers choose between a firm
with disclosed conflicts and a firm whose business model does not
involve the same conflict(s)?
8. Provide data and other information on how other aspects of the
market for personalized investment advice would change if we adopt any
of the alternative approaches discussed above. In particular, provide
data about how the alternatives described above would impact the costs
to retail customers and any associated effect on access to products and
services. As stated above, specific information about the potential
economic impact of the staff's recommendations, including information
about the potential impact on competition, capital formation and
efficiency, may particularly help inform any action we may take in this
area.
9. Provide data and other information describing the benefits and
costs related to alternative approaches to the standards of conduct
other than those specified in this request for data and other
information. Additional approaches and standards of conduct for persons
providing personalized investment advice include but are not limited to
those standards established under the laws of other countries.
10. Provide explanations describing why responses to particular
questions are not possible.
F. Request for Data and Other Information Relating to Account
Conversions
In 2007, as a result of the court decision in Financial Planning
Association v. SEC \70\ (``FPA''), broker-dealers offering fee-based
brokerage accounts (i.e., brokerage accounts in which the broker-dealer
charged a single asset-based fee, instead of commissions, for its
services) became subject to the Advisers Act with respect to those
accounts; as such, those client relationships, which had previously
been primarily subject to Exchange Act and SRO rules, became subject to
the Advisers Act and the fiduciary duty thereunder. Business practices
since FPA present an example from which to draw comparative costs and
benefits differences between retail brokerage and advisory accounts, as
well as the cost and benefit and potential consequences of imposing a
fiduciary standard on broker-dealers. In 2007, our staff had estimated
that there were over one million fee-based brokerage accounts,
representing approximately $300 billion, many of which were converted
to advisory accounts \71\ or otherwise were transitioned back to
traditional commission-based brokerage accounts. Broker-dealers that
converted fee-based brokerage accounts to advisory accounts (especially
those that converted to non-discretionary advisory accounts) and retail
customers whose accounts were converted as a result of FPA are in a
position to provide comparative cost and benefit data for retail
brokerage and advisory accounts (for the firm and/or the retail
customer), and therefore to provide cost and benefit data on the
imposition of a fiduciary standard generally.
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\70\ Financial Planning Association v. SEC, 482 F.3d 481 (DC
Cir. 2007). The court vacated Rule 202(a)(11)-1 under the Advisers
Act which excepted broker-dealers from being classified as
investment advisers based solely on their receipt of asset-based
fees and in effect, exempted broker-dealers that offered these fee-
based accounts from regulation as investment advisers.
\71\ Temporary Rule Regarding Principal Trades with Certain
Advisory Clients, Investment Advisers Act Release No. 2653 at 4
(Sept. 24, 2007).
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In addition, we are aware that some firms have made the decision to
convert their retail brokerage accounts to advisory accounts outside of
the specific context of FPA. We understand such account conversions may
have occurred for a variety of reasons, including a firm's decision to
change its business model. We similarly believe that firms that have
engaged in such account conversions and retail customers whose accounts
were converted are in a position to provide comparative cost and
benefit data for retail brokerage and advisory accounts (for the firm
and/or the retail customer), and therefore to provide cost and benefit
data on the imposition of a fiduciary standard generally.
We recognize that any such data and other information relating to
the conversion of brokerage accounts to advisory accounts, and the
imposition of a fiduciary standard will only be an approximation of the
costs and benefits of the uniform fiduciary standard described above.
Specifically, the uniform fiduciary standard described above does not
incorporate the entirety of the Advisers Act, whereas any brokerage
accounts converted to advisory accounts would be subject to the
Advisers Act as a whole. Accordingly, to the extent possible, we
request that any such data and other information exclude costs and
benefits associated with complying with aspects of the Advisers Act not
included within the uniform fiduciary standard (such as sections 206(3)
and 206(4) and the rules thereunder) or, if commenters are unable to
exclude such costs, we request that they indicate that the data and
other information include costs of complying with such sections and
rules. Similarly, with respect to broker-dealers that converted fee-
based brokerage accounts to advisory accounts as a result of FPA, we
request that the data provided exclude to the extent possible, or at a
minimum identify that, such data include costs (e.g., legal and
consulting fees, other costs) related to the uncertainty regarding the
treatment of such accounts immediately following FPA.
We generally request data and other information on costs and
benefits from or relating to: (1) Broker-dealers that converted fee-
based brokerage accounts to advisory accounts as a result of FPA; (2)
firms that independently determined to convert retail brokerage
accounts to advisory accounts outside of the context of FPA; and (3)
retail customers whose accounts were converted under either of these
scenarios.\72\ We also request certain data and other information on
costs and benefits from firms and retail customers who did not convert
brokerage to advisory accounts as a result of the FPA decision. In
addition to the specific requests below, when providing this data and
other information, we request commenters' responses be made, where
possible, in compliance with the guidelines set forth in the Appendix,
and also request commenters provide background information and
documentation to support any economic analysis. We request commenters
separate, if possible, all data and other information (including
associated retail customer demographic information on the accounts)
based on whether the account conversions resulted from FPA or whether
the account conversions were voluntary.
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\72\ We reiterate that the uniform fiduciary standard of conduct
would not prohibit the receipt of commissions, or require conversion
of accounts from brokerage to advisory.
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1. Provide data and other information describing whether account
conversions were in response to FPA, or to an independent determination
by firms or
[[Page 14861]]
retail customers. If the latter, provide data and other information
describing factors contributing to the conversion of brokerage accounts
to advisory accounts. Also provide data and other information about
administrative costs and customer notifications arising from the
transition from brokerage accounts to advisory accounts.
2. Provide data and other information describing retail customer
accounts transitioning from brokerage accounts to advisory accounts
including the amount of assets and securities held. Also, provide data
and other information describing factors contributing to retail
customers' decisions to convert to advisory accounts, including
perceived costs and benefits of brokerage accounts and advisory
accounts. If possible, associate retail customer demographic
information with account descriptions.
3. Provide data and other information describing the factors
contributing to broker-dealers' decision not to offer fee-based
accounts, which would be advisory accounts, in response to FPA. In
addition, provide data and other information describing retail customer
accounts that were not transitioned from a brokerage account to an
advisory account in response to FPA when the firm provided the customer
the opportunity to transition, including the amount of assets and
securities held. Also, provide data and other information describing
factors contributing to retail customers' decisions not to convert to
advisory accounts, including perceived costs and benefits of brokerage
accounts and advisory accounts. If possible, associate retail customer
demographic information with account descriptions.
4. Provide data and other information describing the impact of the
account conversion on the types of services and securities dual
registrants offer to retail customers transitioning from brokerage
accounts to advisory accounts. Did the application of the Advisers Act
require a firm, or give a firm an incentive, to modify or eliminate
then-current business practices? Provide data and other information
describing why the business practices were so modified or eliminated.
Indicate whether business practices are transaction-specific, account-
specific, customer specific, or firm-wide, and differentiate by retail
customer demographic and account information.
5. Provide data and other information describing changes, if any,
in the benefits and costs of providing services to retail customers
transitioning from brokerage accounts to advisory accounts. Did retail
customers transitioning accounts experience a change in costs? If
possible, separate costs by service type, and differentiate by retail
customer demographic and account information.
6. Provide data and other information describing changes, if any,
to the security selections of dual registrants and the types of
securities held by retail customers transitioning from brokerage
accounts to advisory accounts. Also provide quantitative data and other
information describing changes, if any, to the security returns (net
and gross of fees) of retail customers transitioning accounts. If
security returns are not available, describe total account returns,
including changes in account value and the amount of account inflows/
outflows. If possible, identify whether initial security ownership took
place before the account transition and whether account selections were
solicited or unsolicited, and differentiate by retail customer
demographic and account information.
7. Provide data and other information describing changes, if any,
to the ability of retail customers that transitioned from brokerage to
advisory accounts to bring claims against their financial professional
with a particular focus on dollar costs to the retail customer and the
results when claims are brought. We especially welcome the input of
persons who have arbitrated, litigated, or mediated claims (as a retail
customer, broker-dealer or investment adviser), their counsel, and any
persons who presided over such actions. In particular, describe changes
for claims brought against broker-dealers and investment advisers with
respect to each of the following:
a. the experience of retail customers, in general, between bringing
a claim against a broker-dealer as compared to bringing a claim against
an investment adviser;
b. any legal or practical barriers to retail customers bringing
claims against broker-dealers or investment advisers;
c. the disposition of claims;
d. the amount of awards;
e. costs related to the claim forum, as it affects retail
customers, firms, and associated persons of such firms;
f. time to resolution of claims;
g. the types of claims brought against broker-dealers (we welcome
examples of mediation, arbitration and litigation claims);
h. the types of claims brought against investment advisers (we
welcome examples of mediation, arbitration and litigation claims);
i. the nature of claims brought against broker-dealers as compared
to the nature of claims brought against investment advisers (e.g.,
breach of fiduciary duty, suitability, breach of contract, tort); and
j. the types of defenses raised by broker-dealers and investment
advisers under each regime.
If possible, differentiate by retail customer demographic and
account information.
8. Provide data and other information describing changes, if any,
to the experiences of retail customers that were transitioned from
brokerage to advisory accounts. Among other things, did retail customer
satisfaction with their account change? If possible, control for retail
customer demographic and account information.
9. Provide other data and other information describing the benefits
and costs, if any, of transitioning retail customer brokerage accounts
to advisory accounts. If possible, differentiate by retail customer
demographic and account information. Also, provide data and other
information describing the benefits and costs to firms or retail
customers from the regulations prior to account conversion. Lastly,
provide explanations describing why responses to particular questions
are not possible.
IV. Request for Data and Other Information Relating to Potential Areas
for Further Regulatory Harmonization
We seek data and other information on the nature and extent to
which we should consider harmonizing the regulatory obligations of
broker-dealers and investment advisers other than their standard of
conduct. As stated above, in the Study the staff recommended that the
Commission consider harmonizing certain regulatory requirements of
broker-dealers and investment advisers where such harmonization appears
likely to add meaningful investor protection, taking into account the
best elements of each regime. We request that commenters, in
particular, provide such data and other information regarding
harmonizing some or all such obligations in situations where a broker-
dealer and an investment adviser perform the same or substantially
similar function, such as the provision of personalized investment
advice about securities to retail customers where harmonization is
consistent with the mission of the Commission.\73\ We also are mindful
that we should consider changes to the standard of conduct of broker-
dealers and investment advisers within the context of the overall set
of regulatory obligations that apply to those firms and the potential
costs and benefits that may be associated with such changes. The extent
to which the
[[Page 14862]]
standard of conduct changes, for example, could result in certain other
regulatory requirements no longer being workable in practice, or
becoming unnecessarily duplicative of current requirements in whole or
in part. Similarly, if we were to adopt a uniform fiduciary standard of
conduct for broker-dealers and investment advisers, we should consider
whether regulatory obligations that apply today to only one registrant
class or the other would meaningfully enhance investor protections if
applied uniformly to both.
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\73\ See Study at 129-139.
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In the Study, the areas the staff suggested the Commission consider
for harmonization included advertising and other communications,
supervision, licensing and registration of firms, licensing and
continuing education requirements for persons associated with firms,
books and records, and the use of finders and solicitors. The staff
stated that this listing was not intended to be a comprehensive or
exclusive listing of potential areas of harmonization.
We seek data and other information on these areas of potential
harmonization, including with respect to the advantages and
disadvantages of engaging in such harmonization. As we explained in
Part I.B above, many of the areas the staff identified for potential
harmonization are more specific than a uniform fiduciary standard of
conduct. Accordingly, we do not provide an extensive discussion of the
various options available for considering regulatory harmonization,
which could generally include:
Applying certain broker-dealer obligations to investment
advisers, or vice versa;
Eliminating certain obligations that apply to broker-
dealers but not investment advisers, or vice versa;
Creating new obligations that would apply to both broker-
dealers and investment advisers; or
Taking no further action at this time with respect to
regulatory harmonization.
As discussed above, we believe that a broad consideration of
harmonization of regulatory obligations is important in helping us
assess whether and to what extent we should consider making adjustments
to the other regulatory obligations of broker-dealers and investment
advisers. We invite commenters to provide us with their views on the
benefits and costs for different approaches for potential
harmonization. For example, we request comment on the extent to which
regulatory harmonization might address customer confusion about the
obligations owed to them by broker-dealers and not investment advisers
(or by investment advisers and not broker-dealers) even if a uniform
fiduciary standard of conduct is implemented. We also request comment
on the extent to which regulatory harmonization might result in
additional investor confusion or otherwise negatively impact investors.
A. Potential Areas for Harmonization
In the Study, the staff recommended that the Commission consider
whether to pursue various options for harmonizing investment adviser
and broker-dealer regulation. As a preliminary matter, and in order to
continue to evaluate the potential impact of harmonization, we are
requesting data and other information on the potential harmonization of
the non-exhaustive areas set forth below. These specific areas of
potential harmonization largely reflect the areas of harmonization
recommended by the staff in the Study. The staff's recommendations
generally focused on adopting the existing elements of each regulatory
regime that the staff believed are most effective in protecting retail
customers, and the discussion below largely reflects these
recommendations. We request comment on which of these areas, if any,
the Commission should consider for harmonization, what harmonization in
such areas should entail in practice, and the benefits and costs
associated with such harmonization, including the extent to which such
harmonization would increase or reduce retail customer confusion about
the regulatory obligations of broker-dealer and investment advisers. We
may consider harmonization of other areas not addressed below.
Accordingly, we request comment on which areas, if any, the Commission
should consider for harmonization, and what such harmonization should
entail.
The identification of these areas below and the description of how
harmonization may be accomplished are not intended to suggest a policy
view of the Commission or the ultimate direction of any proposed action
by the Commission. Indeed, the description of each area of potential
harmonization below is but one example of many ways in which the
Commission may harmonize regulation, should the Commission determine
such harmonization is appropriate. We are cognizant that the Commission
may decide not to pursue harmonization, may pursue harmonization in
different areas, or pursue a different approach to harmonization in the
areas identified by the Study, and we seek comment on such areas and
approaches, including the associated benefits and costs.
We also seek comment as to whether harmonization in each area
identified below or by a commenter as appropriate for such action
should involve changing the existing standards of one regime to
accomplish harmonization, or whether an entirely different requirement
should be adopted for both investment advisers and broker-dealers.
We request data and other information, including whether meaningful
investor protection would be enhanced, on the following potential areas
of harmonization where existing investment adviser and broker-dealer
obligations differ: \74\
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\74\ For more information about the potential harmonization
areas, see Study at 129-139.
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1. Advertising and Other Communications: Advertising and other firm
communications can have a significant impact on retail customers, as
they can persuade customers to enter into relationships or engage in
transactions. As noted in the Study, both investment advisers and
broker-dealers are subject to general prohibitions on misleading
communications, but specific content restrictions differ. The Study
concludes that a significant difference between investment adviser and
broker-dealer regulation regarding advertisements and other
communications is that, under certain circumstances, a registered
principal of the broker-dealer must approve a communication before
distributing it to the public, and certain communications must be filed
for review with the applicable regulatory body.\75\
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\75\ For the staff's discussion regarding potential
harmonization of requirements related to advertising and other
communications, see Study at 130-132.
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While the Advisers Act does not specifically prescribe that a
communication must be approved before distribution to the public, the
Commission has stated that an adviser's compliance policies and
procedures, at a minimum, should address, among others, the accuracy of
disclosures made to investors, clients, and regulators, including
account statements and advertisements.\76\ We request data and
[[Page 14863]]
other information on the enhancement to meaningful investor protection
as well as the benefits and costs of harmonizing requirements relating
to:
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\76\ See Compliance Programs of Investment Advisers and
Investment Companies, Investment Advisers Act Release No. 2204 (Dec.
17, 2003) (adopting Advisers Act Rule 206(4)-7) (``Compliance
Rule'') (stating that ``[w]e expect that an adviser's policies and
procedures, at a minimum, should address the following issues to the
extent that they are relevant to that adviser: [* * *] [t]he
accuracy of disclosures made to investors, clients, and regulators,
including account statements and advertisements; [* * * and]
[m]arketing advisory services, including the use of solicitors * *
*''). For this purpose, the Advisers Act requires an adviser to
designate a chief compliance officer (``CCO''). The Commission has
stated in the Compliance Rule that the CCO should be knowledgeable
about the Advisers Act and have the authority to develop and enforce
appropriate compliance policies and procedures for the adviser.
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a. Advertisements and other customer communications, generally.
b. Developing similar substantive advertising and customer
communications rules and/or guidance for broker-dealers and investment
advisers regarding the content of advertisements and other customer
communications for similar services? Please identify any particular
rules that could be applied to both broker-dealers and investment
advisers, and any rules that would not be appropriate to apply to both.
If a particular rule would not be appropriate for both, why not?
c. Establishing consistent internal pre-use review requirements for
investment adviser and broker-dealer advertisements, such as by
requiring investment advisers to designate employees to review and
approve communications and advertisements?
d. Imposing consistent pre- and post-use filing requirements for
similar investment adviser and broker-dealer advertisements?
2. Use of Finders and Solicitors: The term ``finder'' is generally
understood (for purposes of broker-dealer regulation) to mean an
intermediary who receives a fee for ``finding'' potential investors for
issuers seeking to sell securities. Similarly, a ``solicitor' is an
intermediary used by advisers to ``solicit'' clients and prospective
clients for advisory services. Intermediaries who ``find'' investors
can have a significant impact on retail customers, as they can persuade
investors to enter into relationships or engage in transactions. The
regulation of these intermediaries differs. One who receives
transaction-based compensation in connection with the sale of
securities, including a finder, must register as a broker-dealer unless
an exemption from registration is available. By contrast, while
solicitors may fall within the definition of ``investment adviser''
under the Advisers Act, the Commission has taken the position that a
solicitor who engages in solicitation activities in accordance with
Rule 206(4)-3(a)(2)(iii) is an associated person of an investment
adviser and is not required to register with the Commission as an
investment adviser solely as a result of those activities.\77\ An
investment adviser that uses a solicitor's services must treat the
solicitor as an associated person to the extent the solicitor acts as
such for the adviser, and the adviser has a responsibility to supervise
the solicitation activities.\78\ In addition, the Advisers Act
regulation focuses on disclosure to clients of the solicitor's material
conflicts of interest.\79\ We request data and other information on the
enhancement to meaningful investor protection as well as the benefits
and costs of harmonizing requirements relating to:
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\77\ Requirements Governing Payments of Cash Referral Fees by
Investment Advisers, Investment Advisers Act Release No. 688 (July
12, 1979).
\78\ Id. An investment adviser's supervision obligations are
discussed below.
\79\ For the staff's discussion regarding potential
harmonization of requirements related to the use of finders and
solicitors, see Study at 132-133.
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a. Harmonizing the existing regulatory requirements applicable to
finders and solicitors, generally.
b. Establishing similar disclosure requirements regarding any
conflict associated with the solicitor's and finder's receipt of
compensation for referring a retail customer to an investment adviser
or broker-dealer?
3. Supervision: Effective supervisory systems and control
procedures are important investor protection tools, as they can help
firms identify and prevent abusive practices. As the Study notes, while
both broker-dealers and investment advisers are required to supervise
persons that act on their behalf, broker-dealers are subject to more
specific supervisory requirements, including rules that expressly
require broker-dealers to, among other things, establish a supervisory
system, conduct periodic inspections of branch offices and supervise
outside business activities and private securities transactions of
associated persons.\80\ As discussed above, investment advisers are
also required to adopt compliance policies and procedures, which
generally would include policies and procedures for the supervision of
persons associated with an adviser.\81\ Further, the Advisers Act code
of ethics rules (Advisers Act Rule 204A-1) specifically requires, among
other things, that an investment adviser pre-approve acquisitions of
securities in any initial public offerings or in limited offerings by
certain of its investment advisory personnel. Investment advisers are
also required to disclose to clients certain material outside business
activities of their supervised persons.\82\ We request data and other
information on the enhancement to meaningful investor protection as
well as the benefits and costs of harmonizing requirements relating to:
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\80\ Existing broker-dealer supervisory obligations generally
require firms to, among other things, establish and maintain a
supervisory system for their business activities and to supervise
the activities of their registered representatives, principals and
other associated persons for purposes of achieving compliance with
applicable securities regulations, including the rules relating to
principal trades. See NASD Rule 3010. Moreover, broker-dealers are
required to ``establish procedures for the review and endorsement by
a registered principal in writing * * * of all transactions * * * of
its registered representatives with the public relating to the
investment banking or securities business of such member.'' NASD
Rule 3010(d)(1).
\81\ See supra note 77.
\82\ See Part 2A of Form ADV.
---------------------------------------------------------------------------
a. Harmonizing supervisory requirements of investment advisers and
broker-dealers, generally.
b. Establishing a single set of universally applicable requirements
versus scaling requirements based on the size (e.g., number of
employees or a different metric) and nature of a broker-dealer or an
investment adviser? Please identify any particular requirements that
should apply to both broker-dealers and investment advisers, and any
requirements that should not apply to both, and why or why not. If
requirements were scaled, what would be appropriate metrics and
thresholds? \83\
---------------------------------------------------------------------------
\83\ For the staff's discussion regarding potential
harmonization of requirements related to supervision, see Study at
135-136.
---------------------------------------------------------------------------
4. Licensing and Registration of Firms: Broker-dealers and
investment advisers register with the Commission and/or states using
forms that are similar but separate. In addition, broker-dealers must,
prior to commencing business, satisfy FINRA's membership application
process, which aims to fully evaluate relevant aspects of applicants
and to identify potential weaknesses in their internal systems, thereby
helping to ensure that successful applicants would be capable of
conducting their business in compliance with applicable regulation.
Investment advisers are not subject to this type of review by the
Commission. As stated in the Study, substantive review of investment
adviser applications could improve investor protection as it could help
prevent firms that are unprepared to engage in the advisory business or
to meet the obligations they will be assuming under the federal
securities laws from entering the advisory business. We request data
and other information on the enhancement to meaningful investor
protection as well as the benefits and costs of harmonizing
requirements relating to:
[[Page 14864]]
a. Harmonizing the licensing and registration requirements
applicable to firms, generally.
b. Harmonizing the disclosure requirements in Form ADV and Form BD
to the extent they address similar issues.
c. Imposing a substantive review of investment advisers prior to
registration similar to, or distinct from, the review applicable to
broker-dealers.\84\
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\84\ For the staff's discussion regarding potential
harmonization of requirements related to licensing and registration
of firms, see Study at 136-137.
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5. Continuing Education Requirements for Persons Associated with
Broker-Dealers and Investment Advisers: Associated persons of broker-
dealers are required to fulfill continuing education requirements. No
such requirement exists for investment adviser personnel at the federal
level, who instead must disclose to clients their education and
business background. As noted in the Study, continuing education can
help to further a regulatory goal that investors are served by
professionals that are knowledgeable in current industry trends,
practices and regulations.\85\ We request data and other information on
the enhancement to meaningful investor protection as well as the
benefits and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------
\85\ For the staff's discussion regarding potential
harmonization of requirements related to continuing education
requirements, see Study at 138.
---------------------------------------------------------------------------
a. Harmonizing the continuing education requirements applicable to
the associated persons of investment advisers and broker-dealers,
generally.
b. Requiring associated persons of investment advisers to be
subject to federal qualification examinations and continuing education
requirements?
6. Books and Records: Books and records are important for firms to
facilitate effective supervision and compliance, and for regulators to
access information and verify the entity's compliance with applicable
requirements. Broker-dealers are required to retain all communications
received and sent, as well as all written agreements (or copies
thereof), relating to a firm's ``business as such,'' \86\ whereas
advisers are required to retain a more limited set of records falling
into specific enumerated categories. As noted in the Study, ''[t]hese
differences limit the effectiveness of internal supervision and
compliance structures and the ability of regulators to access
information and verify the entity's compliance with applicable
requirements.'' \87\ We request data and other information on the
enhancement to meaningful investor protection as well as the benefits
and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------
\86\ See Exchange Act Rules 17a-4(b)(4) and (b)(7); 17 CFR
240.17a-4(b)(4) and (b)(7).
\87\ See Study at 139.
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a. Harmonizing the recordkeeping requirements applicable to
investment advisers and broker-dealers, generally.
b. Applying the ``business as such'' record retention standard to
investment advisers?
7. Other Potential Areas for Harmonization: We request information
and comment on whether there are other potential areas of harmonization
where the nature of existing investment adviser and broker-dealer
obligations differ and investor protection would be meaningfully
enhanced. In particular, we request data and other information on the
enhancement to meaningful investor protection as well as the benefits
and costs of harmonizing requirements relating to:
a. Harmonizing a set of business conduct rules for both broker-
dealers and investment advisers, where relevant to investment advisers'
businesses.
b. Harmonizing other requirements for broker-dealers and investment
advisers.
c. Establishing a single set of universally applicable requirements
versus scaling requirements based on the size (e.g., number of
employees or a different metric) and nature of a broker-dealer or an
investment adviser.
For each other potential area of harmonization addressed, please
identify any particular requirements that should apply to both broker-
dealers and investment advisers, and any requirements that should not
apply to both, and why or why not.
B. Request for Data and Other Information Relating to Changes in the
Marketplace for Personalized Investment Advice Resulting from
Harmonization
The Commission requests the following data and other information
relating to changes in the marketplace for personalized investment
advice about securities for retail customers as a result of
implementing each area of harmonization described above. In providing
such data and other information, we request commenters follow the
Guidelines found in the Appendix to this request for data and other
information including the request therein for background information.
1. Provide data and other information on the benefits and costs to
firms and retail customers, including synergies (i.e., enhanced cost
efficiencies for firms), specific examples of effects on investor
protection, and potential barriers to entry (i.e., cost prohibitions),
which would result from harmonization of each of the areas identified
above.
2. Provide data and other information about alternative approaches
to harmonization that the Commission should consider, including options
for reducing costs on broker-dealers and investment advisers while
increasing the effective protection of retail customers.
3. Provide data and other information describing the impact or
potential impact the implementation of the uniform fiduciary standard
of conduct, or any of the alternative approaches discussed in Part III
of this request for data and other information, would have on the
benefits and costs to firms and to retail customers of each area of
harmonization. Indicate, for example, whether harmonization of a
particular area of regulation would impact the costs or benefits
associated with complying with the uniform fiduciary standard and each
of the alternative approaches discussed above. Also provide comment and
data on whether the harmonization of one or more of the areas described
above has any impact (i.e., whether it enhances, detracts, or has no
impact) on the implementation of the uniform fiduciary standard of
conduct or any of the other approaches described in Part III of this
request for data and other information.
4. For dual registrants, provide data and other information on any
cost savings and potential retail customer benefit of having a
consistent set of standards.
5. Provide data and other information describing the extent to
which harmonization would increase or reduce retail customers'
confusion about the regulatory status of the person from whom they
receive financial services (i.e., whether the party is a broker-dealer
or an investment adviser) and provide information describing why.
Provide data and other information describing the extent to which
harmonization would increase or reduce retail customers' confusion
about the types of obligations owed to them and provide information
describing why.
By the Commission.
Dated: March 1, 2013.
Elizabeth M. Murphy,
Secretary.
APPENDIX: Suggested Submission Guidelines for Comments
This Appendix outlines the background and particular data and
other information we request commenters to provide and the general
guidelines we request commenters to follow when submitting data and
other
[[Page 14865]]
information. While we are particularly interested in receiving data
and other information that is empirical and quantitative in nature,
we welcome and encourage all interested parties to submit their
comments, including qualitative and descriptive analysis of the
benefits and costs of potential approaches and guidance. We ask that
commenters provide only data and other information that they wish to
make publicly available, and that commenters who may be concerned
about making proprietary or other highly sensitive data and other
information public may wish to pool their data with that of others
(e.g., through a trade association, law firm, consulting firm or
other group) and submit aggregated data in response to this request
for data and other information. While we request commenters to
provide enough data and other information to allow the Commission to
replicate findings, commenters should remove any personally
identifiable information (e.g., of their customers) before
submitting data and other information in response to this
request.\88\ Commenters can submit data and other information using
a sample of retail customers. We ask commenters to sample in a
manner which is independent of retail customer characteristics, and
to describe the sampling methodology including sample
identification, data collection, and any other important factor in
sample construction. Also, if possible, provide a description of the
population of retail customers not included in the sample. We also
ask commenters to provide a variable to allow the Commission to
distinguish among accounts. The variable should not incorporate
personally identifiable information, and can be as simple as a
random number.
---------------------------------------------------------------------------
\88\ See supra note 23.
---------------------------------------------------------------------------
We ask commenters to provide a cover letter when submitting data
files to the Commission. As part of the cover letter, we ask
commenters to include documentation describing each field in the
data files including the units of measurement (e.g., percent,
thousands, thousands of dollars, millions, millions of dollars),
variable name, general and specific formats (e.g., number,
character, date, length of character field, format of date), and
value if missing (e.g., ``.'' or `` ''). Other important
documentation includes an overall description of the dataset, the
source of the information, and the time period of observations. We
ask commenters to send the data on a physical storage medium such as
a CD ROM or DVD, either in plain text or comma-separated values
(csv) files. We also ask commenters to clearly label the physical
storage medium, providing commenter name, date, and a short
description of the data files. Commenters can submit more than one
dataset if, for instance, the data is available on different systems
or in different locations. In this case, we ask commenters to
provide a variable in each dataset that links account information
and that allows the Commission to distinguish among accounts. We
also ask commenters to submit only one copy of the data files.
A. Commenter Identification and Background
We request commenters to provide background information to add
context to submissions and improve our understanding of the current
marketplace:
1. Indicate your status (or the status of your organization if
you are writing on behalf of an organization), as applicable, as a
Commission-registered broker-dealer, Commission-registered
investment adviser, associated person of a Commission-registered
broker dealer or Commission-registered investment adviser, dually
registered entity or individual, retail customer, or other (if
other, please describe).
2. If you are (or are writing on behalf of) a broker-dealer,
investment adviser, or dually registered investment adviser/broker-
dealer, or associated person thereof, describe the firm's business,
including number and type of business segments, sources and total
amount of firm revenue, and the proportion of firm revenue
attributable to retail customers.
3. If you are (or are writing on behalf of) a broker-dealer,
investment adviser, or dually registered investment adviser/broker-
dealer, describe the retail customer segment of the firm's business,
including the number and type of accounts (brokerage or advisory),
total asset value within each account type, and the proportion of
retail customers to whom the firm provides personalized investment
advice. If the firm is dually registered, also indicate the
proportion of accounts (based on the number of accounts and total
assets under management) that are advisory accounts and the
proportion that are brokerage accounts, and of the advisory
accounts, the proportion that are non-discretionary accounts. Also,
if the firm is dually registered, indicate the proportion of retail
customer advisory accounts and the proportion of brokerage accounts
receiving personalized investment advice.
B. Requests for Specific Characteristic Information
We ask commenters to provide the following specific
characteristics when providing data and other information describing
retail customer demographics and accounts; broker-dealer or
investment adviser services offered; securities; and the claims of
retail customers in dispute resolution:
1. Retail customer demographic information--age, wealth, income,
education, and risk profile.
2. Retail customer account information--general type (brokerage
or advisory), specific type (e.g., clearing, execution-only, full-
service), amount of assets held, compensation arrangement (e.g.,
fees, commissions) and amount, investment strategy, the date of
account opening, and the state in which the account is held.
3. Broker-dealer or investment adviser services offered--type
(e.g., include trade execution; product, transaction, and asset
allocation recommendations; and provision of customer-specific
research and analysis).
4. Securities--type (e.g., stocks, bonds, funds, options,
structured products), CUSIP number or other standard identifier,
investment rating (if any), and date of initial retail customer
ownership.
5. Security Positions--long or short position, number of shares/
units held, position value, and the currency of valuation.
6. Retail customer claims evidence--nature of claim, forum for
claim, time to resolution, and outcome.
If providing aggregate data and other information, we ask that
commenters fully describe the sample population, including the
number of retail customers and total assets under management, retail
customer demographics, account characteristics, and security
characteristics.
C. Submission Guidelines for Economic Analysis
The market for personalized investment advice is difficult to
analyze because of the number of factors that empirical tests must
address in order to achieve definitive conclusions. While some
reports and studies address the market for personalized investment
advice, the difficulty to control for certain factors and/or
insufficient documentation of the empirical sample and methodology
results in interpretive difficulties. When submitting qualitative
and quantitative economic analysis, we request commenters adhere to
the following guidelines:
1. The analysis should focus on non-discretionary retail
customer brokerage and advisory accounts. To the extent the analysis
focuses on institutional investor accounts or discretionary
accounts, if possible please specify this.
2. Identify and discuss all underlying assumptions, including
actions that may be taken in response to a change in regulation. If
providing quantitative analysis also clearly articulate empirical
methodologies leading to analytical conclusions and provide tests
statistics to validate claims. Isolate the additional benefits and
costs from any additional assumptions made. If providing qualitative
economic analysis also identify and discuss all supporting evidence.
3. Identify and distinguish initial benefits and costs
(including those associated with transitioning from existing
standards to potential new standards of conduct), and on-going
benefits and costs. Also identify whether certain benefits and costs
may decrease or increase over time. Indicate whether benefits and
costs are transaction-specific, account-specific, business segment
specific, or firm-wide. If possible, separate the benefits from the
costs and isolate by activity and by account type. When describing
transition costs, describe and explain any relevant actions that may
be taken in response to a change in regulation, including possible
ways to mitigate costs or increase benefits.
4. Describe the sample population, including the number of
retail customers and total assets under management, retail customer
demographics, and account characteristics. And, if possible, provide
a description of the population of retail customers not included in
the sample.
5. Submit data that would allow the Commission to replicate
findings.
6. Identify which requested quantitative data, if any, is not
possible, or would be
[[Page 14866]]
prohibitively costly, to provide, and explain why.
[FR Doc. 2013-05222 Filed 3-6-13; 8:45 am]
BILLING CODE 8011-01-P