by Howard Haykin

 

 

On June 1, the Securities and Exchange Commission issued a shout-out to retail investors and other interested parties for comments on ‘Standards of Conduct for Investment Advisers and Broker-Dealers’. The SEC last solicited public comment on these issues in 2013.

 

The Public Statement notes that Chair Jay Clayton believes that “an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends is important to the Commission's ability to evaluate the range of potential regulatory actions.”

 

Toward that end, and consistent with prior SEC practice, the Commission has made available a webform and e-mail box for members of the public to make their views on these issues known publicly in advance of any future Commission action.  In this regard, public views on the following questions, as well as other information the public believes to be relevant to these issues and the Commission's consideration of potential future actions, are welcome:

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• Retail investors have expressed confusion about the type of professional or firm that is providing them with investment advice, and the standards of conduct applicable to different types of relationships. 

►  To what extent has this reported confusion been addressed? 
►  If meaningful confusion remains, is the confusion harming retail investors or resulting in other costs? 
►  If so, what steps should be taken to address this situation? 
►  What disclosures, advertising, or other information do investment advisers and broker-dealers provide to retail investors currently, and how do those contribute to or mitigate any investor confusion? 
►  Are there specific disclosure requirements or other steps the Commission should consider to address any confusion regarding applicable standards?

 

• Have potential conflicts of interest related to the provision of investment advice to retail investors in various circumstances been appropriately identified and, if so, have they been appropriately addressed? 

►  Are there particular areas where conflicts are more prevalent, have greater potential for harm, or both? 
►  To what extent are retail investors being, or expected to be, harmed by these conflicts currently and in the future?  For example, do certain types of relationships result in systematically lower net returns or greater degrees of risk in retail investors' portfolios relative to other similarly-situated investors in different relationships? 
►  Are there steps the Commission should take to identify and address these conflicts? 
►  Can they be appropriately addressed through disclosure or other means?  How would any such steps to address potential conflicts of interest benefit retail investors currently and over time? 
►  What costs or other consequences, if any, would retail investors experience as a result of any such steps?  For example, would broker-dealers or investment advisers be expected to withdraw from or limit their offerings or services in certain markets or products?

 

• Market developments and advances in technology continue to transform the ways in which retail investors obtain advice (e.g., robo-advisers, fintech). 

►  How do retail investors perceive the duties that apply when investment advice is provided in new ways, or by new market entrants? 
►  Is this perception out of step with the actual obligations of these entities and, if so, in what ways? 
►  How should these market developments and advances in technology affect the Commission's consideration of potential future actions? 
►  What steps should the Commission take, if any, to address potential confusion or lack of information in these emerging areas?

 

• Is there a trend in the provision of retail investment advice toward a fee-based advisory model and away from a commission-based brokerage model? 

►  To what extent has any observed trend been driven by retail investor demand, dependability of fee-based income streams, regulations, or other factors? 
►  To what extent is any observed trend expected to continue, and what factors are expected to drive the trend in the future? 
►  How has any observed trend impacted the availability, quality, or cost of investment advice, as well as the availability, quality, or cost of other investment products and services, for retail investors? 
►  Does any such trend raise new risks for retail investors? 
►  If so, how should these risks affect the Commission's consideration of potential future action?

 

• Although the applicability date of the Department of Labor's Fiduciary Rule has not yet passed, efforts to comply with the rule are reportedly underway. 

►  What has been the experience of retail investors and market participants thus far in connection with the implementation of the Fiduciary Rule? 
►  How should these experiences inform the Commission's analysis?  
►  Are there other ways in which the Commission should take into account the Department of Labor's Fiduciary Rule in any potential actions relating to the standards of conduct for retail investment advice?

 

• As of the applicability date of the Fiduciary Rule, there will be different standards of conduct for accounts subject to the Department of Labor's rule and those that are not, as well as existing differences between standards of conduct applicable to broker-dealers and those applicable to investment advisers when providing investment advice. 

►  What are the benefits and costs of having multiple standards of conduct?

 

• Are there particular segments of the market (e.g., smaller and regional broker-dealers and investment advisers, or smaller investor accounts) to which the Commission should pay particular attention in considering potential future actions?

 

• If the Commission were to proceed with a disclosure-based approach to potential regulatory action, what should that be? 

►  If the Commission were to proceed with a standards-of-conduct-based approach to potential regulatory action, what should that be? 

►  Should the standards for investment advisers and broker-dealers be the same or different?  Why?

 

• How would any such suggested approach (disclosure, conduct standards, etc.) be implemented? 

►  Specifically, what initial steps would need to be taken to conform to the new rules, and what ongoing processes (e.g., policies and procedures) would need to be put into place to promote compliance and oversight? 
►  Would the Commission need to provide additional regulatory guidance or rules? 
►  If so, what should those be and why would it be important for the Commission to provide those? 
►  Should the Commission address related disclosures or engage in other regulatory improvements in conjunction with any future action with respect to standards of conduct (e.g., adopt enhanced standards for performance disclosures)?

 

• Should the Commission consider acting incrementally, taking into account the effects of its initial action before considering further proposed actions? 

►  What are the benefits and costs of such an approach?

 

• If the Commission were to impose new requirements, should private remedies be available for violations of any new requirements? 

►  If so, in what venue or venues should such claims be brought?  Should the Commission establish uniform rules, or should parties determine available remedies by contract, so long as not inconsistent with the securities laws?

 

• To what extent, if any, can changes in technology enhance the effectiveness and efficiency of regulatory action?

 

• For purposes of Commission action in this area, if any, who should be considered to be "retail investors"?

 

• For purposes of Commission action in this area, if any, how should "investment advice" be defined? 

►  Should certain activities be expressly excluded from the definition of "investment advice"?

 

• What are the expected benefits, costs, or other economic effects, whether direct or indirect, of the potential approaches that the Commission could consider in this area, on retail investors, market participants, and on the market for investment advice more generally? 

►  To what extent, if any, would the investment opportunities and choices available to retail investors be affected?

 

• Where does the U.S. stand in this area relative to other jurisdictions and should the approaches of other jurisdictions inform our analysis? 

►  Have any regulatory developments occurred in non-U.S. jurisdictions over the past years that you believe have impacted the market for retail investment advice in those jurisdictions in a manner that would be instructive to our consideration?  Are there any related studies or analyses that demonstrate the impact of these reforms on the market for retail investment advice?

 

• As described above, the Commission in 2013 issued a comprehensive solicitation of data and other information, including about the then-current market for personalized investment advice, and about the potential effects of a Commission-mandated single standard of conduct for investment advisers and broker-dealers (e.g., following Section 913 of the Dodd-Frank Act). 

►  In that release, the Commission used a series of assumptions that, while not indicating a chosen direction with respect to key issues, was intended to narrow and focus comment.  For example, the Commission's assumptions included that broker-dealers could continue to receive commissions and engage in principal trades with their customers; that any conduct standard would apply at the point of sale and not impose a continuing duty; and that prior guidance and precedent applicable to investment advisers would be tailored to broker-dealers in a manner that reflects the difference in their engagement with customers. 

►  The Commission also sought information about private claims against investment advisers and broker-dealers by retail investors. 
►  Are there any material changes to the assumptions that the Commission laid out in that request for comment, the requested data and other information, or any other developments that you believe the Commission should consider in its continued review and analysis of these issues?