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Speech by SEC Commissioner:
A Tale of Two Studies: Investment Management Institute Keynote Remarks


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

PLI New York Center
New York, New York
February 10, 2011

Thank you, Barry, for that truly kind introduction. As for many of you, I suspect, for me Barry and Paul have long been the go-to guys on IM issues, so I was really flattered when they asked me to appear here this year. And, I was even more flattered when they pointed out that this slot is usually reserved for the IM Division Director. Of course, after a couple of minutes, it slowly dawned on me that, there might be a time after Buddy left and before Eileen comes on board where IM would lack a permanent Division Director, so perhaps I wasn’t being paid a high compliment at all. But, seriously, I am delighted to be here this morning at this year’s Investment Management Institute.

With Valentine’s Day fast approaching, I think it is only fitting that I speak to you today about something that is near and dear to my heart—and that is the need to protect retail investors seeking investment advice by harmonizing the regulation of investment advisers and broker-dealers. I have spoken on this topic several times publicly in speeches and more times than I can count privately in meetings at the Commission. Given the studies recently released by the Commission, I think it makes sense to revisit the topic again with you. Before I begin, however, let me just remind you that my remarks today represent my own views and not necessarily the views of the Commission, the individual Commissioners, or my colleagues on the Commission staff.1

In the past several months, the Commission and its staff have been busy at work implementing many provisions under the Dodd-Frank Act that require Commission action, and last month the Commission submitted to Congress two significant studies—one relating to the regulation of investment advisers and broker-dealers, and the other relating to the examination of investment advisers.


Pursuant to Section 913 of Title IX of the Dodd-Frank Act, on January 21, 2011, the Commission submitted to Congress a cross-divisional staff study on the effectiveness of the standards of care required of broker-dealers and investment advisers providing personalized investment advice about securities to retail customers (the “913 Study”). The 913 Study considered, among other things, whether there were regulatory gaps, shortcomings, or overlaps that should be addressed by rulemaking.

Uniform Fiduciary Standard

Given that I have been a vocal advocate for the harmonization of the regulation of broker-dealers and investment advisers when they provide similar services to retail investors and the need for a fiduciary standard for all financial professionals, it should come as no surprise that I was generally pleased with the Study’s recommendation that the Commission establish a uniform fiduciary standard of conduct for investment advisers and broker-dealers when providing personalized investment advice about securities to retail investors—one that is no less stringent than the standard that is currently applied to investment advisers under Sections 206(1) and (2) of the Investment Advisers Act of 1940. Specifically, the Study recommends that the Commission exercise its rulemaking authority under the Dodd-Frank Act to provide that:

the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), 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.

I think establishing a uniform fiduciary standard is central to protecting retail investors given that the lines between investment advisers and broker-dealers continue to blur, with both sets of professionals providing investment advice to my Aunt Millie and the rest of the retail investing public, and often “changing hats” when they do. Investors are understandably confused by the differences between, and the different labels attached to the financial professionals. In fact, in reaching its recommendation, the Study recognizes that the investment adviser and broker-dealer businesses were merging, and that this business evolution, among other factors, has led to further confusion among retail investors, as similar conduct is governed by two comprehensive but distinct regulatory regimes. Retail investors generally expect investment professionals (whether investment advisers or broker-dealers) to act in their best interests, and the 913 Study correctly concludes that retail investors should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations. Instead, as the Study concludes, retail investors should be “protected uniformly when receiving personalized investment advice or recommendations about securities, regardless of whether they choose to work with an investment adviser or a broker-dealer.”2 This is important both to provide for the integrity of advice given to retail investors and to match legal obligations with the expectations and needs of investors.

However, as I have said before and as Justice Frankfurter said before me, determining that a person should be subject to a fiduciary standard is only the beginning of the analysis. We need to explain what that duty requires.3 I believe that it is important for the Commission to do a better job here. Both investors and the industry deserve the clarity that Commission guidance and rulemaking would provide. In this regard, I note that the 913 Study recommends that the Commission address the components of the uniform fiduciary standard: the duty of loyalty and the duty of care.

For example, the Study recommends that the Commission consider prohibiting or requiring mitigation of certain conflicts of interest. The Commission’s past focus has largely been on using disclosure to address advisers’ conflicts, as opposed to requiring advisers to take specified action to mitigate conflicts or even prohibiting particularly acute conflicts. The Study also addresses disclosure, recommending facilitation of the provision of uniform, simple and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers. It also recommends that the Commission provide guidance on how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading, and states that, at a minimum, the broker-dealer should be required to disclose its conflicts of interest related to such transactions, including its capacity as principal.

Further, the 913 Study recommends that the Commission consider specifying uniform standards for the duty of care owed to retail investors. For example, minimum baseline professionalism standards could include specifying what basis an investment adviser or a broker-dealer should have in making a recommendation to an investor. While an adviser’s obligation to only make suitable recommendations is implicit in its obligation to conduct itself as a fiduciary, the Commission has never adopted explicit suitability requirements for advisers.

Of course, the devil is always in the details. As the Commission moves to implement the uniform fiduciary standard for investment advisers and broker-dealers, I will be paying close attention to ensure that the fiduciary standard is not weakened or watered down. I look forward to having conversations with the broker-dealer and investment advisory communities and other interested parties to get their views on how the Commission should proceed, especially with respect to offering interpretive guidance.

Harmonization of Regulation

Implementing a uniform fiduciary standard for investment advisers and broker-dealers is only half the story, however. When investment advisers and broker-dealers are performing the same or substantially similar functions, they should be subject to the same or substantially similar regulations.

The 913 Study recommends that the Commission consider harmonizing investment adviser and broker-dealer regulation in areas such as advertising, the use of finders and solicitors, supervisory requirements, licensing and registration of firms and associated persons, and books and records. With respect to books and records, for example, I was pleased to see the recommendation for the Commission to consider whether investment advisers should be subject to a broader requirement—a requirement that they retain all communications and agreements relating to their “business as such.” In my view, this would increase the effectiveness of internal supervision and compliance structures of investment advisers and improve the ability of regulators to evaluate their compliance with applicable requirements.

I also fully agree with the recommendation that the Commission consider whether investment advisers should be subject to a substantive review prior to their registration with the agency. This recommendation reflects my general view that any new registrant seeking a license to do business from the Commission should go through some form of a vetting process in which it would be required to demonstrate that it has the legal, operational, and financial capacity to carry on its proposed business. Investment advisers could, for instance, be subject to an evaluation similar to that currently applied when a broker-dealer starts up its business to ensure that it has the capacity to conduct its business, as well as the capacity to comply with applicable regulations. I also would note the Study’s recognition of the differences in the financial responsibility rules applicable to investment advisers and broker-dealers. Although the Study did not make specific recommendations in this area, I believe it might be a good idea for the Commission to explore comparable financial requirements for both types of financial professionals — to ensure that they have sufficient resources to fund their operations and to meet their obligations to investors and counterparties.

Final Thoughts and Moving Forward

Let me end this discussion of the 913 Study with some final thoughts. I do not agree with those who call for further study before proposals are formulated or those who believe that the Study failed to show whether retail investors are being harmed by the different regulatory regimes.

Investment advisers and broker-dealers perform similar services for the investing public, but are regulated differently. Those are the facts of life in 2011. We know about the history behind that divide, but I, for one, have not received a satisfactory answer to the question why those investor protections should continue to differ as business models continue to merge. Investing is hard enough. I simply do not believe that investors should also bear the burden of understanding distinctions between financial professionals that have become increasingly less relevant over the years, in order to understand the levels of protection they are entitled to under the law. Rather, I am convinced that the regulation of a financial professional should depend on what she does, not what she calls herself or how she is paid, and that investors should receive the same level of protection when they purchase comparable products and services, regardless of the financial professional involved. As it is now, differential regulation means that retail investors cannot count on the same level of protection whenever they receive investment advice. Thus, they are adversely impacted, and I believe that the Commission is not doing enough to address the underlying problem.

The 913 Study recognizes this and, therefore, recommends the Commission, not just to establish a uniform fiduciary standard, but also to work to harmonize the regulation of broker-dealers and investment advisers. It is only in harmonizing the two regimes that the Commission will fully carry out the goal of protecting retail investors receiving investment advice.


Now I would like to turn briefly to the study on examinations of investment advisers. Just a few days before the 913 Study was released, on January 19th, the staff of the Division of Investment Management delivered to Congress a study reviewing options for enhancing examinations and enforcement resources for investment advisers (the “914 Study”). In particular, Section 914 of Title IX of the Dodd-Frank Act expressly requires that the Commission examine three areas:

  • The frequency of investment adviser examinations over the past five years;
  • Whether designation of one or more investment adviser self regulatory organizations (“SROs”) would improve the frequency of examinations; and
  • Current and potential approaches to examination of advisers who are also registered as, or affiliated with, broker-dealers.

After concluding that the Commission likely will not have sufficient capacity in the near or long term to conduct effective examinations of registered investment advisers with adequate frequency and that its adviser examination program requires an adequate source of funding, the Study recommended three options to Congress, authorizing:

  • the Commission to impose user fees on investment advisers to fund their examinations;
  • one or more SROs, subject to Commission oversight, to examine investment advisers; and
  • FINRA to examine dual registrants for compliance with the Advisers Act.

As you know, I was disappointed with the result of the Study. Although it was an extremely difficult decision, I felt that it was necessary for me to submit a separate statement to clarify and emphasize certain facts, and ensure that Congress is fully aware of the severity of the Commission’s resource problem. In my statement, I attempt to lay out the facts—facts that, in my view, demonstrate that our lack of resources is not just a problem for the near or long term; our lack of resources is, and has been for some time, a huge issue now and, as a result, we have been unable to fulfill our mandate with respect to investment adviser examinations. The number and frequency of examinations of investments advisers simply must increase if we are to adequately protect clients of investment advisers. Given the Commission's limited resources, it is simply not possible for the agency to examine these entities regularly.

In my statement, I also tried to present a balanced picture of the options and explain advantages of the SRO approach not shared by user fees. Today, I want to reiterate my support for an SRO as a solution. Despite suggestions in the 914 Study that the establishment of an SRO would not enhance the Commission’s own oversight resources, I believe that use of the SRO model would bring a number of significant benefits to the regulatory framework. For example, the presence of SROs would allow the Commission to leverage its resources. The SROs could handle routine examinations of financial professionals, while the Commission could devote its examination resources primarily to SRO oversight and risk-based analysis, inspection, and oversight of the industry. This would allow the Commission to take a more targeted inspection approach by concentrating on those firms perceived to be the greatest comparative risk to investors.

Further, while use of an SRO would mean that the Commission could do its job with a smaller examination workforce, by eliminating the need to perform a large number of routine examinations, it actually would provide the opportunity for that smaller group to be more expert and experienced. Significantly, the SRO model would increase the frequency of examinations of investment advisers—thus directly answering the main question that Congress posed to us in Section 914.

To those who are opposed to an SRO model for investment advisers, I say let’s sit down and talk through your concerns. For example, if your concern is that an SRO may be biased against investment advisers, we can address that concern. If you think that an SRO should only examine a subset of investment advisers, such as those that provide advice to retail clients, we are open to all potential solutions. Don’t oppose a good idea; work with us to shape its reality.

There is much more that I could say on the 914 Study if time permitted. Alas, however, I want to make sure that I leave adequate time for questions.


In closing, let me just say that I appreciate the opportunity to be with you today and share some of my thoughts on the regulation of broker-dealers and investment advisers. Please know that you should feel free to call me or send an e-mail if you have any thoughts on these or other topics. My door is always open to you, and I am always interested in your perspectives, thoughts, and ideas. Thank you again for asking me to be with you today. Now I would be happy to take your questions.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.

2 See page 101 of Study on Investment Advisers and Broker-Dealers (Jan. 2011) (the "Section 913 Study"), available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf.

3 As Justice Frankfurter stated in another context, "to say that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary?" SEC v. Chenery Corp., 318 U.S. 80, 85-86, 87 L. Ed. 626, 63 S. Ct. 454 (1943).



Modified: 02/11/2011