SEC Releases Two Studies Affecting Investment Advisers


Pursuant to sections 913 and 914 of the Dodd-Frank Act, the SEC conducted two studies impacting the oversight of investment advisers. Each study was conducted by a cross-divisional staff task force within the SEC.

Study on Investment Advisers and Broker-Dealers
Section 913 of the Dodd-Frank Act tasked the SEC with conducting a study on investment advisers and broker-dealers to evaluate the effectiveness of existing standards of care, assess whether any regulatory gaps or overlaps exist in the protection of retail customers relating to the standards of care, and make recommendations. The study outlines the task force’s findings and makes recommendations to the SEC for potential new rulemaking, guidance and other policy changes.

The majority of attention garnered by the study surrounded whether broker-dealers should be held to a fiduciary standard, as opposed to the existing suitability standard. In this regard, the study concluded brokers that provide individual investment advice should be held to a fiduciary standard. However, the aspect of the study that will have the greater impact on advisers is whether and how the SEC will harmonize rules and regulations of registered investment advisers and broker-dealers.

In the end, the study confirms investor confusion about the distinction between investment advisers and broker-dealers, and that most investors don’t really understand the different rules and standards that apply to each. Given the level of investor confusion, the report suggests harmonizing adviser and broker-dealer rules. The areas proposed for harmonization include:

Advertising: The report urges the SEC to consider, at a minimum, pre-use review requirements for investment advisers. Such review requirements would require investment advisers to designate employees to review and approve all advertisements. This review process is already required of broker-dealers in certain circumstances.

Licensing and Registration: The report strongly suggested the SEC consider whether investment advisers should be subject to a substantive review before registration. In doing so, the report outlined the FINRA membership process. Read as a whole, this section of the report seems to suggest that if the SEC implements a review process, it could use FINRA’s requirements as a guide. In the end, however, the study notes such a review process is not practical without additional resources.

Continuing Education: The study states that the SEC should consider subjecting investment adviser representatives to continuing education and licensing requirements, much like those already required of broker-dealers. No such program exists for advisers, and the report suggests this is a gap in investment adviser regulation.

Books and Records: Lastly, the report recommends the SEC consider whether to modify the Advisers Act books and records requirements. Specifically, the recommendation is to add a general requirement that investment advisers retain all communications and agreements related to an adviser’s “business as such.” This language is currently in the broker-dealer model. Overall, the study suggests investment advisers’ books and records rules be consistent with current broker-dealer rules.

The SEC plans to propose rules based on this study sometime between April and July, 2011.

Study on Enhancing Investment Adviser Examinations
Required by section 914 of the Dodd-Frank Act, this study focused on the level of examination of investment advisers, and proposed options for addressing capacity constraints. In conclusion, the study recommended three options that Congress should consider:

  • Authorize the SEC to impose user fees on registered investment advisers to fund exams;
  • Authorize one or more self-regulatory organizations (SRO) to examine all registered investment advisers, subject to SEC oversight; or
  • Authorize FINRA to examine dual registrants for compliance with Advisers Act.
The report garnered much criticism from its release. Included in those critical of the report was SEC Commissioner Elisse Walters, who issued a separate statement in which she expressed disappointment the study did not reach the definitive conclusion, and affirmed her support for SRO oversight.








© 2010 Vista360, LLC. All Rights Reserved.