An Analysis of the Potential Impact of a Uniform Fiduciary Standard Upon Broker-Dealers, Registered Investment Advisers, and Dually-Registered Advisers

James J. Eccleston is the chief strategist and
lead attorney for all clients of Eccleston Law
Offices, P.C. He has extensive experience
representing financial services professionals
in SEC, FINRA, and state disciplinary matters,
employment termination cases, non-compete
and non-solicitation cases, promissory note
collection cases, and SEC compliance matters.
He is a chairperson-qualifi ed FINRA arbitrator
as well as a qualifi ed FINRA mediator. He has
held numerous securities licenses, including
investment adviser Series 65, securities principal
Series 24, and securities representative Series
7. He is admitted to practice in Illinois,
Massachusetts, the United States District Court
Northern District of Illinois, and the United
States District Court District of Massachusetts.
Christine E. Goodrich is an attorney in the
New York office of Eccleston Law Offices,
P.C. Ms. Goodrich earned her Juris Doctor and
International Law Certificate from Pace Law
School and also earned her MBA from the Lubin
School of Business. Ms. Goodrich earned her B.S.
in Business Management from Case Western
Reserve University. While earning her law degree,
Ms. Goodrich gained invaluable experience
in securities arbitration at the John Jay Legal
Services, Inc./Pace Investor Rights Clinic. Her
practice is focused on representing advisers and
investors. Ms. Goodrich is licensed to practice
law in New York and New Jersey.

By James J. Eccleston and Christine E. Goodrich
I. Introduction
Widely considered to be the most sweeping fi nancial regulatory reform
of the modern era, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”) was signed into law nearly three years
ago. Section 913 of Dodd-Frank granted the Securities and Exchange
Commission (“SEC”) “discretionary rulemaking authority under the
Securities Exchange Act of 1934 (“Exchange Act”) and the Advisers Act
to adopt rules establishing a uniform fi duciary standard of conduct for
all broker-dealers and investment advisers when providing investment
advice.”1 Section 913 of Dodd-Frank further required that “any standard
of conduct [adopted by the SEC] shall be no less stringent than the
standard applicable to investment advisers under Sections 206(1) and
206(2) of the Advisers Act.”2
Since the SEC published its study of Investment Advisers and
Broker-Dealers as mandated by Section 913 of Dodd-Frank3 over two
years ago (“Study” or “SEC Study”), the fi nancial industry has been
awaiting a determination by the SEC as to whether it will impose
a heightened standard of care upon broker-dealers, similar to the
fi duciary duty impliedly imposed on investment advisers pursuant to
Th e Investment Advisers Act of 1940 (“Advisers Act”). Th e primary
recommendations of the SEC Study were that the SEC should “engage
in rulemaking to implement a uniform fi duciary standard of conduct
for broker-dealers and investment advisers when providing personalized
investment advice about securities to retail customers” and should
“consider harmonizing certain regulatory requirements of broker-dealers
and investment advisers where such harmonization appears likely to
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
enhance meaningful investor protection.”4 Th e Study did not,
however, provide information regarding the costs and benefi ts
of the current regulatory regime as compared to the costs
and benefi ts that would likely be realized if the SEC were to
exercise its rulemaking authority. Similarly, the Study did not
generate comments regarding either of the aforementioned
cost-benefi t analyses.
Recently, the SEC took the next step towards a potential
heightened standard when it released a Request for Data and
Other Information regarding the Duties of Brokers, Dealers
and Investment Advisers (“Request”). Th e Request specifi ed
that the SEC intends to use the data and information collected
to inform its “consideration of alternative standards of conduct
for broker-dealers and investment advisers when providing
personalized investment advice about securities to retail
customers,” such as the potential establishment of a uniform
fi duciary standard, as well as to inform its consideration
of the “potential harmonization of certain other aspects of
the regulation of broker-dealers and investment advisers.”5
Importantly, the Request also calls upon commenters to
provide the SEC with a cost-benefi t analysis for a uniform
fi duciary standard of conduct, and the various alternative
approaches thereto, as outlined in the Request.
As will be discussed in detail below, the potential
implementation by the SEC of a uniform fi duciary standard,
alternatives thereto and/or various other aspects of regulatory
harmonization will have a substantial impact not only on
fi nancial service professionals, but also on their customers and
their employers. Th is article will provide an overview of the
current regulatory regime and traditional duties of a fi duciary,
as well as an overview of the practical implications of both
a uniform fi duciary standard and alternative approaches to
such a standard, as well as the overall eff ect of the potential
standards on the various stakeholders in the industry.
II. Current Regulatory Framework and
Standard of Care
Under the current framework, broker-dealers and investment
advisers are subject to diff erent regulatory regimes, despite the
fact that many of the services off ered by both groups overlap.
Investment advisers are subject to the Advisers Act and, as a
result, owe fi duciary duties to their clients. Broker-dealers, on
the other hand, are subject to the Exchange Act and are not
generally considered to be fi duciaries to their customers, with
some exceptions.6 Broker-dealers are also subject to the rules of
each and every self-regulatory organization (“SRO”) of which
it is a member. However, applicable antifraud provisions and
federal securities laws are applicable to both broker-dealers
and investment advisers.
Notably, studies have refl ected that many retail customers
are not aware of the diff erences between broker-dealers and
investment advisers, and the corresponding duties owed to the
customer.7 Th is is most true in recent years where the “lines
between full-service broker-dealers and investment advisers
have become blurred,” a fact that is especially troublesome when
“specifi c regulatory obligations depend on the statute under
which a fi nancial intermediary is registered instead of the services
provided.”8 Th e SEC Study and Request are an eff ort to both
“enhance retail customer protections and decrease retail customers’
confusion about the standard of conduct owed to them when
their fi nancial professional provides them with personalized
investment advice,”9 potentially through the establishment of a
uniform fi duciary standard or some variation thereof.
III. Assumptions Underlying Potential
Standards Being Considered by the SEC
In its Request, the SEC set forth various assumptions that
presumably would underlie any standard it ultimately
decides to impose. Th e general assumptions below would,
for the purposes of the SEC’s Request, underlie any proposed
approach to adopting a uniform standard of conduct.10
A. “Personalized investment advice about securities” would
“include a ‘recommendation’ as interpreted under existing
broker-dealer regulation, and would include any other
actions or communications that would be considered
investment advice about securities under the Advisers
Act.”11 “Personalized investment advice” would not,
however, include “’impersonal investment advice’ as used
for purposes of the Advisers Act,” nor would it include
“general investor educational tools” so long as those tools
“do not constitute a recommendation under current law.”12
B. “Retail customer” would be defi ned in the same way the
term is defi ned under Dodd-Frank, 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.”13
C. Any action taken by the SEC would be applicable to all
“SEC-registered broker-dealers and all SEC-registered
investment advisers.”14
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
D. Th e uniform fi duciary standard would not require fi rms
to charge an asset-based fee, but instead “would be
designed to accommodate diff erent business models and
fee structures of fi rms, and would permit broker-dealers
to continue to receive commissions.”15 Moreover, brokerdealers
would continue to be allowed to be “engaged in,
and receive compensation from, principal trades.” Also,
“at a minimum, a broker-dealer or investment adviser
would need to disclose material confl icts of interests, if
any, presented by its compensation structure.”16
E. Th e uniform fi duciary standard “would not generally
require a broker-dealer or investment adviser to either:
1) have a continuing duty of care or loyalty to a retail
customer after providing him or her personalized
investment advice about securities, or 2) provide
services to a retail customer beyond those agreed to
between the retail customer and the broker-dealer or
investment adviser.”17 Rather, the question of whether
the broker-dealer or investment adviser has a continuing
duty, and the nature and scope of such duty, would be
determined by the arrangement between the parties,
whether contractual or otherwise, including the “totality
of the circumstances of the relationship and course of
dealing between the customer and the fi rm.”18 Moreover,
the uniform fi duciary duty would not apply to, and
the broker-dealer or investment adviser would not
be required to provide, services beyond those agreed
to through a contractual or other arrangement or
understanding with the retail customer.”19
F. Th e fact that a fi rm off ers, or that a broker-dealer or
investment adviser recommends, “only proprietary or a
limited range of products would not in and of itself be
considered a violation of the uniform fi duciary standard
of conduct.”20
G. Th e rules applicable to investment advisers, namely
Sections 206(3) and 206(4) of the Advisers Act would
continue to apply to investment advisers but would
not become applicable to broker-dealers. To satisfy the
fi duciary standard, a broker-dealer would be required
to “disclose any material confl icts of interest associated
with its principal trading products.”21
H. Currently applicable “law and guidance governing
broker-dealers, including SRO rules and guidance,
would continue to apply to broker-dealers.”22
As with all the assumptions in the Request, including
but not limited to those listed above, the SEC has expressly
stated that such assumptions should not be taken as a suggestion
of the agency’s policy view or the ultimate direction
of any proposed action.23 It seems clear, however, that at a
minimum, the assumptions provide a road map of the various
factors that the SEC is taking into account while analyzing
the potential implications of a uniform fi duciary standard,
or alternatives thereto.
IV. Potential Standards Under
Consideration by the SEC24
A. Uniform Fiduciary Standard
As discussed above, Section 913 of Dodd-Frank requires the
SEC, if it determines to exercise its rulemaking authority to
enact a uniform fi duciary standard (or some variation thereof),
to adopt a standard no less stringent than the standard applicable
to investment advisers under Sections 206(1) and 206(2) of the
Advisers Act.25 Th ese sections of the Advisers Act have been
interpreted by the Supreme Court as “requiring an investment
adviser to fully disclose to its clients all material
information that is intended to eliminate,
or at least expose, all confl icts of interest
which might incline an investment adviser
– consciously or unconsciously – to render
advice which was not disinterested.”26 Th e
SEC Study recommended that any uniform
standard should necessarily include both a
duty of loyalty and a duty of care, as well
as the extension of “existing guidance and
precedence under the Advisers Act regarding fi duciary duty…
where similar facts and circumstances would make guidance
and precedent relevant and justify a similar outcome.”
1. Duty of Loyalty
Section 913(g) of Dodd-Frank addresses the duty of loyalty
as a crucial component of a uniform fi duciary standard,
indicating that, at a minimum, when a broker-dealer or
…[I]mplementation by the SEC of a uniform fi duciary
standard, alternatives thereto and/or various other
aspects of regulatory harmonization will have a substantial
impact not only on fi nancial service professionals, but
also on their customers and their employers.
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investment adviser provides personalized investment advice,
“any material confl icts of interest shall be disclosed and may be
consented to by the customer.”27 Consistent with Dodd-Frank,
the establishment of a uniform fi duciary standard would
necessarily be “designed to promote advice that is in the best
interest of a retail customer”28 by eliminating the “material
confl icts of interest of a broker-dealer or investment adviser,
or by “providing full and fair disclosure to retail customers
about those confl icts of interest.”29 Th e SEC has stated that
it should be assumed that the agency would provide specifi c
guidelines as to how broker-dealers and investment advisers
could comply with the duty of loyalty component of the
uniform fi duciary duty standard.
Th e SEC has further articulated that commenters may make
several assumptions regarding the duty of loyalty. Firstly, any
standard the SEC would impose would include details of
various disclosure requirements, including, but not necessarily
limited to, the disclosures listed below.30
a) A generalized obligation to disclose all material confl icts
of interest with regard to that specifi c retail customer,
which “could be made largely through the general
relationship guide” described below.31
b) A “general relationship guide similar to Form ADV Part
2A” which would be delivered to the customer “at the
time of entry into a retail customer relationship” and
would contain, at a minimum, a description of the fi rm’s
“services, fees and the scope of its services with the retail
customer.”32 Th e description of the scope of the fi rm’s
services would need to include, but not be limited to,
the following:
i) Whether “the advice related duties are limited
in time or are ongoing, or are otherwise limited
in scope (e.g. limited to certain accounts or
transactions)”33
ii) Whether “the broker-dealer or investment adviser
only off ers or recommends proprietary or other
limited ranges of products;”34 and
iii) Whether “the broker-dealer or investment adviser
will seek to engage in principal trades with a retail
customer”35 and if so, the circumstances in which
he or she would seek to do so.
c) Any rule imposed upon broker-dealers and investment
advisers would “treat confl icts of interest arising from
principal trades the same as other confl icts of interest.”36
This is in contrast to “transaction-by-transaction
disclosures and consent requirements of Section 206(3)
of the Advisers Act for principal trading.”37 Any rule
established would expressly state that the aforementioned
disclosures under Section 206(3) are not applicable,
however “at a minimum, as with other confl icts of
interests, the broker-dealer or investment adviser would
be required to disclose material confl icts of interest
arising from principal trades with retail customers.”38
d) Any rule would prohibit the “receipt or payment of noncash
compensation (e.g., trips and pries) in connection
with the provision of personalized investment advice.”39
2. Duty of Care
Th e SEC indicated in its Request that it could utilize the duty
of care to specify “certain minimum professional obligations of
broker-dealers and investment advisers” in order to promote
the dissemination of investment advice that is in the “best
interests of the retail customer.”40 Th e duty of care likely would
be used to set a minimum standard of care under both existing
law and any new law imposed by the heightened standard.
Additionally, as set forth in the SEC Request, the duty of care
likely would incorporate the components below.41
a) Similar to the current regulatory regime, broker-dealers
and investment advisers would be required to have a
reasonable basis to “believe that [their] securities and
investment strategy recommendations are suitable for
at least some customer(s) as well as for the specifi c retail
customer to whom it makes the recommendation in
light of the retail customer’s fi nancial needs, objectives
and circumstances.”42
b) Certain products recommended by investment advisers
and broker-dealers would be subject to additional
requirements, such as “specifi c disclosure, due diligence
or suitability requirements.”43 Examples of products that
would be subject to these product-specifi c requirements
may include, but not be limited to, penny stocks,
options, debt securities and bond funds, municipal
securities, mutual fund share classes, interests in hedge
funds and structured products.44
c) Broker-dealers and investment advisers (in cases where
“the investment adviser has the responsibility to select
broker-dealers to execute client trades”45) would be
required to “seek to execute customer trades on the
most favorable terms reasonably available under the
circumstances.”46
d) Broker-dealers and investment advisers would be
required to receive fair and reasonable compensation
for their services, taking into account “all relevant
circumstances.”47
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
3. Continuing Application
of Existing Fiduciary Principles
Th e SEC Study did recommend that “existing guidance and
precedent under the Advisers Act regarding fi duciary duty
should continue to apply to investment advisers and be
extended to broker-dealers, as applicable, under a uniform
fi duciary standard of conduct.”48 Nonetheless, the SEC
noted in the Request that application of relevant guidance
and precedence is a fact-specifi c determination based upon
the circumstances surrounding each case and consequently,
the guidance and procedures may not apply to brokerdealers
in certain cases. At a minimum, the SEC Request
identifi ed the principles listed below as those that would
“continue to apply to investment advisers and be extended
to broker-dealers.”49
a) Th e duty of loyalty inherent in a fi duciary duty standard
would generally “require a fi rm to disclose to a retail
customer how it would allocate investment opportunities
among its customers, and between customers and the
fi rm’s own account.”50 Th is would include, but not be
limited to, disclosures regarding the fi rm’s “method of
allocating shares of initial public off erings, as well as its
methods of allocating out of its principal account to its
customers when agency orders are placed on a riskless
principal basis.”51
b) Orders may be aggregated or “bunched” by a fi rm on
behalf of two or more retail customers, “so long as the
fi rm does not favor one customer over another.”52 Th e
fi rm would be required to disclose that it aggregates
orders, and under what conditions it does so. If the fi rm
does not aggregate orders, it would then be required to
state why it does not when it has the opportunity to
aggregate, as well as the practices and costs associated
with not aggregating orders.
B. Alternative Approaches
In its Request, the SEC also identifi ed several alternatives
to the uniform fi duciary standard previously discussed. Th e
SEC hopes that it will receive comments, as well as a costbenefi
t analysis of the alternative approaches detailed below.
Th e purpose is to help the SEC evaluate whether the various
alternatives meet the goals of enhancing retail customer
protections and decreasing retail customers’ confusion about
the standard of conduct owed to them in connection with the
rendering of personalized investment advice. Th e SEC suggests
the following alternatives in the Request:
1. Without imposing a fi duciary standard of conduct, the
SEC may decide to apply a uniform requirement to
broker-dealers and investment advisers which would
require them “to provide disclosures about: a) key facets
of the services they off er and the types of products or
services they off er or have available to recommend; and b)
material confl icts they may have with retail customers.”53
2. Th e SEC may decide to impose the uniform fi duciary
standard of conduct on broker-dealers and investment
advisers, but may decline to extend the existing fi duciary
duty guidance and precedent under the Advisers Act to
broker-dealers. However, the aforementioned guidance
and precedent would still be applicable to investment
advisers.54 As will be discussed in greater detail below,
this is the approach advocated by Th e Securities Industry
and Financial Markets Association (“SIFMA”).
3. Th e SEC may determine that it will leave the current
regulatory scheme applicable to investment advisers
unchanged, while applying the uniform fiduciary
standard to broker-dealers, in part or as a whole. Th e
SEC stated in the Request that this “‘broker-dealer
only’ standard could involve establishing a ‘best interest’
standard of conduct for broker-dealers”55 that would still
meet Dodd-Frank’s requirement that any heightened duty
imposed on broker-dealers must be no less stringent than
the standard currently applied to investment advisers.
4. Alternatively, the SEC may decide that it will leave the
current broker-dealer regulatory regime unchanged while
specifying certain minimum professional obligations
under an investment adviser’s duty of care, as currently
such duties are not specifi ed by rule.56 If the SEC pursued
this approach, “any rules or guidance would take into
account Advisers Act fi duciary principles and … seek
best execution where the adviser has the responsibility
to select broker-dealers to execute client trades.”57
5. Th e SEC also could look abroad to successful models
employed in other international markets. In the United
Kingdom, the Financial Services Authority (“FSA”)
requires “persons providing personalized investment advice
to a retail client to act in the client’s best interests.”58 Th e
FSA has also “set limits on the amount 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.”59 Similar yet distinguishable
policies and standards are employed by Australia, as well
as the European Securities and Markets Authority.60
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
6. Finally, the SEC could take no action at all, and leave
the current regulatory regime for broker-dealers and
investment advisers unchanged. Consequently, the
SEC seeks comments regarding the costs and benefi ts
of leaving the current regulatory framework intact, as
compared to implementing one of the aforementioned
alternatives and/or a uniform fi duciary standard.
V. A Fiduciary’s Duties:
Obligations and Best Practices
In order to determine how the various approaches discussed
above would aff ect the personal fi nance industry, it is
important to highlight the various obligations traditionally
associated with a fiduciary, as these duties will likely
be incorporated, to some degree, into any heightened
standard which may be imposed on broker-dealers and
investment advisers. An excellent resource for doing so is
the Institute for the Fiduciary Standard (the “Institute”)
which has identifi ed six core duties inherent in a fi duciary
standard, and the various attributes accompanying each
of the duties.61
a. Serve in the Client’s Best Interest
A fi duciary is defi ned as “someone acting in a position of
trust on behalf of, or for the benefi t of, a third party.”62 As
such, a fi duciary owes the utmost duty of loyalty to his/her
clients. Th is duty requires the fi duciary to place the client’s
best interests fi rst, ahead of the interests of all other stakeholders,
including the adviser and the fi rm. In order to satisfy, a
fi duciary must ensure that there is no option available to the
client which is “materially better.”63 In connection with serving
the client’s best interests, there are several responsibilities
that a fi duciary must undertake, including, but not limited
to the following:64
i) “Determining investment goals and objectives;
ii) Choosing an appropriate asset allocation strategy;
iii) Establishing an explicit, written investment policy
consistent with [the client’s] goals and objectives;
iv) Monitoring the activities of the overall investment
program for compliance with the investment policy.”65
A fi duciary also has the duty to select asset classes that are
consistent with the identifi ed risk, return and time horizon
specifi ed by the client.66 Th e “key fi duciary inputs” involved
in asset allocation strategy may be defi ned by the acronym
“TREAT: tax status, risk level, expected return, asset class
performance and time horizon.”67
b. Act in the Utmost Good Faith
A fi duciary is required to act in the utmost good faith
of the client. Th is includes, but is not limited to, the duty
to be truthful and straightforward in all communications.
Communications include not only direct statements
spoken to the client, but all statements, whether spoken or
written, regarding the adviser, the adviser’s experience and
recommendations, and the adviser’s fi rm.68
c. Avoid Confl icts of Interest
Historically, concerns regarding confl icts of interest in large
part prompted the enactment of the Advisers Act of 1940, as
confl icts of interests abounded after the stock market crash
of 1929.69 Since the enactment of the Advisers Act, the duty
to avoid confl icts of interest has been a bedrock principle for
fi duciaries. It has been noted that “even well-meaning advisers
often cannot overcome a confl ict and give objective advice.”70
It is essential that advisers closely monitor any potential confl
icts they may have. While it is impossible for an advisor to
avoid every potential confl ict of interest, all advisers should
take reasonable steps to avoid material confl icts and must
“sharply minimize unavoidable [confl icts of interest] and effectively
mitigate or manage confl icts in the best interests of
the client.”71
As a practical matter, if a fi duciary suspects that he or she
may have a confl ict of interest, it is likely such a confl ict does
exist and it is the duty of the adviser to end and/or avoid
the confl ict.72 To evaluate whether a confl ict exists, prior to
selecting a particular investment or making a certain decision
with regard to the client’s account, an adviser should determine
who stands to benefi t most from the transaction or decision.73
If the adviser determines that anyone other than the client
stands to gain the most benefi t, that fi duciary is on the verge
of breaching his or her duties to the client.
d. Disclose and Manage All
Material Facts and Confl icts
As part of their fiduciary duty, investment advisers
have a duty to disclose and manage all material conflicts
they encounter in the course of the relationship with
their clients. What an adviser is required to disclose to
his or her clients depends upon the surrounding facts
and circumstances. Disclosure of all material facts and
conflicts required to be made by an adviser must be “clear,
complete and timely.”74 When an adviser discloses material
facts and conflicts in this manner, it helps the adviser to
manage the material conflict. The adviser must have a
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
reasonable basis to “think that the client fully understands
the disclosure and the implication of the conflict(s), prior
informed written consent if the client wishes to proceed
with a transaction, and continued demonstration by the
adviser that the recommendation is reasonable, fair and
in the client’s best interests.”75
Pursuant to a recent rule proposal promulgated by the
Financial Industry Regulatory Authority, Inc. (“FINRA”),
brokers soon may be required to disclose incentives “to anyone
they solicit for one year following their transfer to a new
fi rm.”76 Th ese incentives would include, but not be limited
to, signing bonuses, upfront or back-end bonuses, loans,
accelerated payouts and transaction assistance, and would only
apply to incentives totaling $50,000 or more.77 In response
to FINRA’s proposal, SIFMA stated that, consistent with its
support of a uniform standard of conduct, “in the context
of recruiting-related bonus payments, the most important
and relevant information for the client is to understand the
potential confl ict associated with the payment.”78 In the event
the proposed FINRA rule is adopted, brokers would have the
duty to disclose compensation incentives, as such incentives
would constitute confl icts of interest.
e. Act Prudently with the Care, Skill and Judgment
of a Professional
Th e requirement that advisers act prudently, and with due care,
with regard to his or her clients encompasses not only following
“a prudent process” but also having the requisite “knowledge
to make appropriate recommendations.”79 Advisers not only
must possess the requisite knowledge, but also must ensure
that their knowledge base and expertise are regularly updated.
In order to exercise due care, an adviser’s process with regard
to making and monitoring investments must be prudent, and
requires “investigating and assessing an investment’s or fi rm’s
characteristics based on objective criteria”, as well as employing
industry best practices to “investigate, evaluate and construct
a portfolio or recommendation.”80
f. Control Investment Expenses
A fi duciary also has an obligation reasonably to control
investment-related costs and expenses. Inherent in this duty
is the obligation of the adviser to ensure all investment-related
expenses are both “fair and reasonable in relation to the services
and investments off ered.”81 Importantly, any inappropriate
or unnecessary expenses are unambiguously considered to
evidence a breach of the duty of loyalty.82 To fulfi ll its duty
to manage investment decisions with the “requisite level of
care, skill and prudence”, a fi duciary is
required to establish a process by which to
ensure that the client is responsible only
for reasonable and necessary expenses.83
Such expenses may include, but are not
limited to, trading costs, consulting and
administrative fees and custodial charges.84
Finally, another key principle of the
concept of a fi duciary is that the fi duciary
duty is incapable of being superseded by
agreement. A fi duciary is under an absolute obligation to “act
in good faith and deal fairly with and for the principal.”85
Consequently, a “principal could not authorize a fi duciary to
act in bad faith.”86
VI. Industry Considerations
Regarding A Heightened Duty
In response to the SEC Study, several industry groups have fi led
comment letters advocating the adoption of various standards.
In particular, an analysis of two notable commentators, SIFMA
and the Institute for the Fiduciary Standard (the “Institute”),
provides insight into several important considerations
regarding the aforementioned approaches.
SIFMA has taken the position that a wholesale extension
of the fi duciary standard currently applicable to investment
advisers pursuant to Section 206 of the Advisers Act would
result in adverse consequences for both investors and the
industry. While the Institute advocates for a uniform standard
as well, its position diff ers fundamentally from the position
of SIFMA.
SIFMA
SIFMA supports “the adoption of a new uniform fi duciary
standard of conduct for broker-dealers and investment
advisers when providing personalized investment advice
about securities to retail customers.”87 To support its position,
SIFMA notes that a wholesale extension of the current
The uniform fi duciary standard would not require fi rms
to charge an asset-based fee, but instead “would be
designed to accommodate different business models and
fee structures of fi rms, and would permit broker-dealers
to continue to receive commissions.
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An Analysis of the Potential Impact of a Uniform Fiduciary Standard
fi duciary standard would not be in the best interests of retail
customers, as it would “impact choice, product access and
aff ordability of customer services.”88 Moreover, according to
SIFMA, wholesale extension of the current standard would
also cause commercial, legal, compliance and supervisory”89
problems for broker-dealers.
SIFMA notes that the inherent diffi culty in extending the
standard is evidenced in part by the core diff erences between
the services provided by investment advisers and brokerdealers.
While investment advisers are generally “engaged in
the business of providing advice about securities for a fee, or
managing assets on a discretionary basis,”90 broker-dealers
provide securities-related advice in addition to a host of other
products and services which are benefi cial to customers and
securities markets as a whole. Th ose additional activities
engaged in by broker-dealers “often carry inherent (though
generally accepted and well-managed) confl icts of interest”
and the current fiduciary duty standard implied under
the Advisers Act “provides incompatible and insuffi cient
guidance for broker-dealers on how to manage, disclose or
obtain consents to these confl icts.”91 Notably, the fact that
commission-based brokerage accounts are the “preferred
model for retail customers”92 could result in reduced access for
customers, as numerous potential confl icts may arise in such
accounts. Although Dodd-Frank provides that commissionbased
compensation in and of itself would not constitute a
violation of a uniform fi duciary standard, SIFMA’s position
is that “undiff erentiated application of existing Advisers Act
case law, guidance and other precedents to broker-dealers
could result in reduced access to brokerage accounts”93 since
presumably such precedence may support a fi nding that a
material confl ict existed in a commission-based account,
depending upon the circumstances.
SIFMA has outlined several key reasons why, in its opinion,
the fi duciary standard under the Advisers Act should not
extend to broker-dealers. Notably, Congress “recognized that
the uniform fi duciary standard should ‘appropriately adapt
to the differences between broker-dealers and registered
investment advisers.’”94 Also, SIFMA has stated that extending
the “inability to gauge compliance with, or legal exposure
under, the Advisers Act” would undermine the current
business model of broker-dealers.95 In situations where the
“business and legal risks are unmanageable, broker-dealers
will withdraw from off ering the aff ected products and services,
which would disserve the interests of retail customers.”96 Th e
undiff erentiated extension of the current fi duciary standard
also would signifi cantly increase the costs associated with
retail customers’ accounts and consequently would reduce
the aff ordability of advisory services, in SIFMA’s opinion, as
such an extension would reduce both options and access to
certain products for retail investors.97
According to SIFMA, the optimal approach would be a new
uniform standard that would prioritize and protect investors’
interests and preserve the choice and access investors currently
have. Th e new standard also would need to be capable of
adapting to the diff erent business models employed by brokerdealers
and investment advisers, meaning that any standard
enacted would be business-model neutral. Another guiding
principle of SIFMA’s approach would be that in the case of a
material confl ict of interest, the SEC should articulate ways
for broker-dealers and investment advisers to provide clear and
eff ective disclosures to customers in a manner which would
comport with the new standard, and receive the customer’s
consent, if required.
With regard to disclosure, SIFMA suggests that customers
may consent to a material confl ict of interest, subsequent
to mandatory disclosure by the broker-dealer or investment
adviser. Not only should disclosures be required to be clear
and concise, but SIFMA’s position is that the SEC should also
take a “layered approach to disclosure” in order to “provide
retail customers with the clearest, most relevant information
at the time it is most important to [the customers’] decision
making, and therefore most likely to be read, with greater detail
simultaneously made available to the customer if desired.”98
Any disclosure updates would be provided through an annual
notifi cation to customers, where such disclosures were deemed
“necessary or appropriate.”99
In articulating the new standard of conduct, under SIFMA’s
approach, the SEC necessarily would provide the “detail,
structure and guidance necessary to enable broker-dealers
to apply the fi duciary standard to their distinct operational
model.”100 Th e success of the new standard of conduct will
depend in important part upon the SEC’s articulation of the
scope of the obligations of broker-dealers and investment
advisers, including but not limited to: 1) when the standard
of conduct should commence;101 2) specification of the
broker-dealer’s obligations under the new standard in the
customer agreement,102 including but not limited to which
disclosures are required and when such disclosures are required;
3) application of the uniform standard on an “account-byaccount
basis”;103 and 4) “inclusion of traditional product
sales and compensation arrangements for broker-dealers.”104
SIFMA further stated that while the current legal precedence
and guidance pursuant to the Advisers Act still would apply to
PRACTICAL COMPL IANCE & RISK MANAGEMENT FOR THE SECURITI ES INDUSTRY | MAY–JUNE 2013 43
An Analysis of the Potential Impact of a Uniform Fiduciary Standard
investment advisers, it would not apply to broker-dealers.105 In
particular, SIFMA noted that broker-dealers should continue
to have the ability to engage in principal transactions under
the new standard, as it was the intent of Congress to preserve
this ability.106
The Institute
Contrarily, the Institute stated that “the rich history of law,
policy and experience provides a backdrop for extending
the fi duciary standard to brokers rendering personalized
investment advice to retail investors.”107 Th e Institute calls
into question SIFMA’s aim to prioritize investors’ interests by
highlighting areas in which SIFMA’s suggested framework seeks
to “ensure that the fi duciary standards adopted by the SEC
will fi t broker-dealers’ existing business practices and business
models”108 instead of promoting and protecting investors’
interests. According to the Institute, the fact that SIFMA
does not advocate for a modifi cation or discontinuation of the
products and services off ered by broker-dealers to investors
is problematic as SIFMA advocates the articulation of a new
standard “without any corresponding change in the advice
and recommendations that may be provided [to investors].”109
In essence, the Institute takes issue with SIFMA’s position
that “suitable product recommendations suffi ce, and that a
fi duciary ‘due care’ screening and investment selection process
to meet the ‘best interest’ standard is not required”110, as such a
position is not consistent with putting investors’ interests fi rst.
With regard to confl icts of interests, the Institute’s view of
SIFMA’s position is clear, stating that “at its core, SIFMA, it
appears, unabashedly champions the benefi ts of confl icted
advice.”111 Moreover, the Institute states that:
“SIFMA’s absolute and unconditional support of
broker-dealers’ ability to continue to have confl icts with
customers’ interests makes it hard not to conclude that
SIFMA’s (1) position is based more on the economic and
business concerns associated with a fi duciary standard
than on customers’ best interests and (2) argument that
customers interests would be harmed if broker-dealers
decided not to provide certain products or services that
involve confl icts of interest is based on the economic
and business repercussions of imposing a true fi duciary
standard on broker-dealers.”112
Th e Institute takes issue with SIFMA’s departure from the
established and unambiguous view of the SEC that advisors
are strongly urged to “avoid confl icts.”113 Furthermore, the
Institute takes issue with SIFMA’s position on required
disclosures. Th e Institute argues that SIFMA’s position with
regard to disclosures, including fl exibility and the layered
approach discussed above, would favor broker-dealers,
investment advisers and their employers, while undermining
the best interests of customers. Moreover, the Institute states
that it is “necessary, but not suffi cient, under a fi duciary
standard for a customer to provide informed consent to a
confl ict of interest” because even where consent has been
obtained, “such consent does not obviate the need for the
fi duciary to also determine that the proposed transaction is
in the best interests of the client.”114
SIFMA’s position that the standard may apply on an
account-by-account basis, as specifi ed within the investor’s
contract, is also problematic for the Institute, as “the fi duciary
duty may not be negotiated and contracted away or otherwise
limited by contract.”115 Moreover, taking SIFMA’s approach
to the standard could, in the Institute’s opinion, result in the
switching of standards by broker-dealers without informing the
customer that the switch is occurring, the reason underlying
the switch and how the switch will aff ect the broker-dealer’s
relationship with the customer.116
Based upon the foregoing (in addition to the numerous
other comment letters received by the SEC in response to its
Study) it is clear that there is signifi cant dissention among
industry commentators and stakeholders as to whether a
new standard should be adopted. Likewise, if a new standard
is adopted, it is clear that there is signifi cant dissention as to
what the new standard should be, as well as the underlying
reasons why various aspects of such a standard are crucial to
industry stakeholders.
VII. Other Considerations
Safe Harbor Provisions
In the event a uniform fiduciary standard ultimately is
imposed, it is unclear whether there would be a “safe harbor
provision” put in place which would “insulate broker-dealers
from any unforeseen consequences of a uniform fi duciary
standard.”117 According to industry expert Donald B. Trone,
any uniform standard, or alternatives thereto, likely would
include a safe harbor provision as the vast majority of federal
regulatory agencies have similar procedures in place.118 Th e
practical eff ect of a safe harbor provision would be that so
long as a fi rm was able to prove it had complied with the safe
harbor provisions set forth by the regulatory agency, it would
be shielded from liability under the new regulation(s).
44 MAY–JUNE 2013 | PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY
An Analysis of the Potential Impact of a Uniform Fiduciary Standard
Based upon other safe harbor provisions in existing
regulations, a safe harbor provision in the uniform fi duciary
standard may resemble the following model:
1. For those who wish to serve in a fi duciary capacity, the
fi rm must “defi ne minimum qualifi cations (in terms of
experience, licensing and training)”119;
2. Advisors would be required to “accept and acknowledge
his or her fi duciary status in writing”120;
3. Advisors serving in an advisory capacity would be
required to agree to “use only investment procedures,
databases, software and technology approved by his or
her fi rm”121;
4. Advisors would be required to “agree to maintain records
demonstrating their procedural prudence (the details of
their decision making process)”122; and
5. Th e fi rm would be required to monitor the activities of
the advisors.123
Th e above model is business-model neutral and is similar
to “supervisory procedures already being followed by FINRA
member fi rms and to procedures SEC-registered investment
advisory firms should have in place.”124 While many in
the industry would advocate the inclusion of a safe harbor
provision in order to enable fi rms to limit their exposure
to liability to the “conduct of the advisor and to the fi rm’s
oversight, supervision and monitoring”125 of the registered
representative or adviser, critics worry that a safe harbor
provision would result in the client’s interests not being
prioritized. However, any fi rms not prioritizing client interests
would arguably be “easy to spot” and consequently would be
“at risk of losing their safe harbor insulation.”126
Effect of Heightened Duty on
Dually-Registered Advisers
Regardless of what form the uniform standard of conduct
might take, if the SEC determines it will exercise its
rulemaking authority and enact such a standard, duallyregistered
advisers may fi nd it diffi cult to determine which
standard should be applicable to them. Th e SEC indicated
that it should be assumed, at least for purposes of the Request,
that any rule which would be enacted “would not relieve an
investment adviser who is also registered as a broker-dealer
from its obligation to comply with Advisers Act Section 206(3)
or the rules thereunder.”127
Based upon the SEC’s Request, it seems likely that if enacted,
the new uniform standard, or alternative thereto, would serve
as a baseline standard of conduct. Investment advisers may
also be subject to any heightened requirements imposed upon
them by the Advisers Act. If the standards were to confl ict,
this would indicate potential areas where harmonization would
be necessary. However, practically speaking, the rule could
specify that the investment advisers could default to whichever
rule is more protective of the investor. It seems that any rule
established would need to include guidelines for what to do
in the event of an undiscovered confl ict, while the body of
law and precedence still was being developed.
Department of Labor Fiduciary
Investment Advice Re-Proposal
On a related note, the Department of Labor (“DOL”)
is expected to issue a re-proposal of its defi nition of an
“investment advice fi duciary” sometime during July 2013
as part of its “campaign to expose and minimize confl icts of
interest in the retirement plan industry.”128
Commentators have noted that the DOL re-proposal likely
will be coordinated with the SEC’s rulemaking regarding
the potential imposition of a uniform fiduciary standard,
or alternatives thereto, upon broker-dealers and investment
advisers.129 Th e DOL and the SEC may exercise their rulemaking
authority at or around the same time, as both the DOL fi duciary
re-proposal and the SEC’s decision regarding whether it will
implement a uniform fi duciary standard for broker-dealers and
investment advisers are both expected in the second half of 2013.
Currently, under the Employee Retirement Income Security
Act (“ERISA”), if an advisor provides investment advice,
the advisor is “automatically deemed to be a fi duciary.”130
Under ERISA, an advisor provides investment advice and is
consequently deemed a fi duciary if:
(1) “such person renders advice to the plan as to the value
or advisability of making an investment in securities or
other property,
(2) on a regular basis,
(3) pursuant to mutual agreement or understanding (written
or otherwise),
(4) that such services will serve as a primary basis for
investment decisions, and
(5) that such person will render advice based on the
particular needs of the pan.”131
Importantly, “investment advice” is more narrowly defi ned
under ERISA than under federal securities laws. If the DOL’s
re-proposal follows the changes set forth in its initial proposal
on the defi nition of whether an advisor is providing fi duciary
investment advice, it is expected that the defi nition will be
PRACTICAL COMPL IANCE & RISK MANAGEMENT FOR THE SECURITI ES INDUSTRY | MAY–JUNE 2013 45
An Analysis of the Potential Impact of a Uniform Fiduciary Standard
broadened to include situations where there is “an understanding
or agreement that the advice ‘may be considered’ in connection
with a plan investment decision, regardless of whether it is
provided on a regular basis.”132 Clearly, such a change could
impose a fi duciary duty on advisors providing “casual or even
one time investment advice.”133 However, under the current
and proposed defi nitions, in order for an advisor to be deemed
a fi duciary, the investment advice given must necessarily be
“individualized advice for the particular plan client.”134
It also is expected that the DOL re-proposal will include
some form of a safe harbor provision where advisors may avoid
fi duciary status by providing various “in your face” disclaimers
to clients. While the DOL’s initial proposal did not require
these disclaimers to be in writing, it “clearly contemplated
some type of notice or acknowledgement form for the plan
client.”135 Essentially, in order to avoid fi duciary status, an
advisor would need to state to his or her client(s) that the
fi nancial advisor is not “providing impartial advice.”136 It seems
that any fi nancial advisor who does not agree to making the
appropriate disclosures and disclaimers to his or her clients
may “be forced out of the retirement plan business.”137
Due to the crossover of fi nancial advisors who service retail
investors as well as retirement plans, it is clear that any rules or
guidelines imposed by the DOL will have a profound impact
upon the entire fi nancial services industry. Consequently,
additional harmonization of industry rules and regulations
likely will be required.
VIII. Conclusion
While the SEC repeatedly has stated that the various approaches
and underlying assumptions included in its Request do not
suggest the agency’s policy view or the ultimate direction of
any proposed action, it seems that the detailed approaches can
fairly be taken as a fundamental core idea base upon which
any policy or rulemaking may be formulated. Given the
enormity of the task of changing the regulatory framework of
the fi nancial services industry, it is no surprise that the SEC
eff ectively has taken two years to issue this Request.
Undoubtedly, the Request will foster much needed analysis
and debate as to whether a heightened standard should be
imposed upon broker-dealers and investment advisers, what
sort of standard should be imposed and how the regulatory
changes would aff ect the fi nancial services industry, as a whole.
Ultimately the fact that the rulemaking process will have taken
several years both should benefi t investors and put reasonable
burdens on the fi nancial services industry.
ENDNOTES
1 Securities and Exchange Commission’s Request for Data and Other Information
regarding the Duties of Brokers, Dealers and Investment Advisers (“SEC
Request”), March 1, 2013, available at www.sec.gov/rules/other/2013/34-69013.
pdf.
2 SEC Request p. 29.
3 Securities and Exchange Commission study on Investment Advisers and
Broker-Dealers (“SEC Study”), January 2011, available at www.sec.gov/news/
studies/2011/913studyfi nal.pdf.
4 SEC Request p. 6.
5 SEC Request p. 1.
6 Brokers may be considered fi duciaries under certain circumstances and certain
state laws. As a general matter, brokers have been found by courts to have
fi duciary status when the brokers: “exercise discretion or control over customer
assets, or have a relationship of trust and confi dence with their customers” (SEC
Request p.3 footnote 3). 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. Griffi n, 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).
7 SEC Request p. 4.
8 SEC Request p. 5.
9 SEC Request p. 6.
10 SEC Request p. 25-29.
11 SEC Request p. 25.
12 Id.
13 SEC Request p. 26.
14 Id.
15 SEC Request p. 26.
16 SEC Request p. 27.
17 Id. Notably, if this assumption were included in any rule that was enacted by
the SEC, harmonization with certain Financial Industry Regulatory Authority Inc.
(“FINRA”) rules currently in force likely would be required. In particular, FINRA
Rule 2111, which sets forth FINRA members’ duties regarding the suitability of
investment recommendations and investment strategies for customers, includes
a continuing suitability obligation after the provision of investment advice.
18 SEC Request p. 27.
19 Id.
20 Id.
21 SEC Request p. 29.
22 SEC Request p. 29.
23 SEC Request p. 25.
24 Importantly, the SEC stated in its Request that the potential standards and
alternative approaches discussed are non-exclusive (see SEC Request p. 24).
25 SEC Request p. 29.
26 SEC Request p. 29, citing SEC v. Capital Gains Research Bureau, Inc.,375 U.S.
180, 194 (1963).
27 SEC Request p. 31.
28 Id at footnote 44.
29 SEC Request p. 31.
30 SEC Request p.32-34.
31 SEC Request p.32-33.
32 SEC Request p. 33.
33 Id.
34 Id.
35 Id.
36 Id.
37 SEC Request p. 34.
46 MAY–JUNE 2013 | PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY
An Analysis of the Potential Impact of a Uniform Fiduciary Standard
38 Id.
39 Id.
40 SEC Request p. 35.
41 SEC Request p. 35-36.
42 SEC Request p. 35.
43 Id.
44 SEC Request p. 35-36.
45 SEC Request p. 36.
46 Id.
47 Id.
48 SEC Request p. 37.
49 Id.
50 SEC Request p. 37-38.
51 SEC Request p. 38.
52 Id.
53 SEC Request p. 39.
54 SEC Request p. 40.
55 Id.
56 Id.
57 Id..
58 SEC Request p. 41.
59 Id.
60 Id.
61 Knut A. Rostad, What Fiduciaries Should Be Reminded Of On Valentine’s Day,
Investment News, at p. 12 (February 11, 2013).
62 Foundation for Fiduciary Studies, Prudent Investment Practices: A Handbook for
Investment Fiduciaries (“Handbook”) at p. 15 (2003).
63 See Rostad.
64 Handbook p. 15.
65 Id.
66 Handbook p. 23.
67 Id.
68 See Rostad.
69 Id.
70 Id.
71 Id.
72 Handbook p. 16.
73 Id.
74 See Rostad.
75 Id.
76 Mark Schoeff Jr., FINRA’s Broker-Comp Proposal Raises Hackles, Investment News,
available at www.investmentnews.com/article/20130305/FREE/130309958#
(March 5, 2013).
77 Id.
78 Id.
79 See Rostad.
80 Id.
81 Id.
82 Id.
83 Handbook p. 30.
84 Id.
85 Comment Letter from Ira D. Hammerman, Senior Managing Director and
General Counsel, Securities Industry and Financial Markets Association (July
14, 2011) (“SIFMA Letter”) at p. 17 footnote 37, available at www.sec.gov/
comments/4-606/4606-2952.pdf.
86 Id.
87 SIFMA Letter p.1, Introduction.
88 SIFMA Letter p. 5.
89 Id.
90 Id.
91 Id.
92 SIFMA Letter p. 11.
93 SIFMA Letter p. 14.
94 SIFMA Letter p. 11.
95 Id.
96 Id.
97 SIFMA Letter p. 14.
98 SIFMA Letter p. 20.
99 SIFMA Letter p. 22.
100 SIFMA Letter p. 15.
101 Id.
102 SIFMA Letter p. 17.
103 Id.
104 Id.
105 SIFMA Letter p. 15.
106 SIFMA Letter p. 23.
107 Comment Letter from Knut A. Rostad, President of The Institute for the Fiduciary
Standard (April 9, 2012) (“Institute Letter”), at p. 4, available at www.sec.gov/
comments/4-606/4606-2972.pdf.
108 Institute Letter p. 5.
109 Institute Letter p. 6.
110 Id.
111 Institute Letter p. 7.
112 Id.
113 Id.
114 Institute Letter p. 10.
115 Institute Letter p. 11.
116 Id.
117 Donald B. Trone, Standard Issue: What needs to be done to advance a fi duciary
standard?, Financial Advisor Magazine p. 48 (January 2013).
118 Id.
119 Id.
120 Id.
121 Id.
122 Id.
123 Id.
124 Trone at p. 85.
125 Id.
126 Id.
127 SEC Request p. 34, footnote 48.
128 Marcia S. Wagner, Broader “Fiduciary” Defi nition: Legal Update, at p. 2, available
at discover.byallaccounts.com/rs/byallaccounts/images/ERISA-Fudiciary-
Defi nition-Legal-Update-WP.pdf.
129 Wagner p. 5.
130 Wagner p. 3.
131 Id.
132 Wagner p. 4.
133 Id.
134 Id.
135 Id.
136 Id.
137 Wagner p. 6.
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