The Study, required under the Dodd-Frank Act before the SEC can issue regulations, does not provide recommendations of specific actions for the SEC to take, other than to impose a broad uniform standard of care for Investment Advisers and Broker-Dealers. The Study also does not recommend prohibiting specific possible conflicts of interest, seeming to rely more on disclosure, though it does note that the SEC has the authority to prohibit specific conflicts. Similarly, it also does not recommend requiring pre-trade consent for principal transactions, but does note that the SEC has the discretion to do so. The full Study is available here.
The Study recommends:
The uniform fiduciary standard would require broker-dealers and investment advisers to act in the best interest of retail customers without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. ….. The Staff interprets the uniform fiduciary standard to include at a minimum, the duties of loyalty and care as interpreted and developed under Sections Advisers Act Section 206(1) and 206(2). ….. The Staff is of the view that the existing guidance and precedent under the Advisers Act regarding fiduciary duty, as developed primarily through Commission interpretive pronouncements under the antifraud provisions of the Advisers Act, and through case law and numerous enforcement actions, will continue to apply to investment advisers and be extended to broker-dealers, as applicable, under the uniform fiduciary standard. (Pages 110-111, emphasis added)
The Study does not recommend banning particular conflicts of interest, though it leaves open the possibility that the SEC may do so in the future.
While the duty of loyalty requires a firm to eliminate or disclose material conflicts of interest, it does not mandate the absolute elimination of any particular conflicts, absent another requirement to do so. (Page 113)
The Staff believes that it is the firm’s responsibility—not the customers’—to reasonably ensure that any material conflicts of interest are fully, fairly and clearly disclosed so that investors may fully understand them. To this end, however, the Commission could consider whether rulemaking would be appropriate to prohibit certain conflicts, or where it might be appropriate to impose specific disclosure and consent requirements (e.g., in writing and in a specific format, and at a specific time) in order to better assure that retail customers were fully informed and can understand any material conflicts. (Page 117)
The Study also refers back to the back to the Dodd-Frank Act about certain practices that cannot, in and of themselves, be considered a violation of a uniform fiduciary standard.
Thus, Dodd-Frank Act Section 913(g) expressly provides that the receipt of commission-based compensation, or other standard compensation, for the sale of securities does not, in and of itself, violate the uniform fiduciary standard as applied to a broker-dealer. It also provides that the uniform fiduciary standard shall not require broker-dealers to have a continuing duty of care or loyalty to a retail customer after providing personalized investment advice. Moreover, as discussed below, while the uniform fiduciary standard would affect certain aspects of principal trading, it would not in itself impose the principal trade provisions of Advisers Act Section 206(3) on broker-dealers. In addition, Dodd-Frank Act Section 913 provides that offering only proprietary products by a broker-dealer shall not, in and of itself, violate the uniform fiduciary standard, but may be subject to disclosure and consent requirements. (Page 113, emphasis added)
These provisions and others should address a number of concerns from broker-dealers that the standard of conduct should be “business model-neutral,” i.e., that the standard should not prohibit, mandate or promote particular types of products or business models. They also make clear that the implementation of the uniform fiduciary standard should preserve investor choice among such services and products and how to pay for these services and products (e.g., by preserving commission-based accounts, episodic advice, principal trading and the ability to offer only proprietary products to customers). (Page 113).
Regarding principal trading, the Study notes that the Dodd-Frank Act does not require the imposition of the pre-trade notice and consent procedures under Section 206(3) of the Advisers Act, but does give the SEC the discretionary authority to impose those procedures on broker-dealers. The Study does note the particular effect that such a requirement would have in the fixed-income market, including municipal bonds.
Dodd-Frank Act Section 913(g) requires that the standard of conduct applicable to broker-dealers should be “no less stringent” than Advisers Act Section 206(1) and (2), and does not refer to Advisers Act Section 206(3). The omission of a reference to Section 206(3) appears to reflect a Congressional intent not to mandate the application of that provision to broker-dealers when providing personalized investment advice about securities to retail investors (though granting the Commission the authority to impose such restrictions). … Principal trades by broker-dealers raise the same potential conflicts of interest as such trades by investment advisers and thus implicate the duty of loyalty included in the uniform fiduciary standard. Therefore, under the uniform fiduciary standard, a broker-dealer should be required, at a minimum, to disclose its conflicts of interest related to principal transactions, including its capacity as principal, but it would not necessarily be required to follow the specific notice and consent procedures of Advisers Act Section 206(3). … The Staff recommends that the Commission address through guidance or rulemaking how broker-dealers would fulfill the uniform fiduciary standard when engaging in principal trades. We understand that this issue is particularly consequential with respect to fixed income securities, including municipal bonds. (Pages 119 – 120, emphasis added)
