SEC Decides it's Time to Help Investors Understand the Difference between Brokers and Advisers

The SEC has finally proposed a rule that will help clarify the distinction between brokers that refer to themselves as "financial advisors" and investment advisers. (We won't get into why it took so long or how this is a response to the Department of Labor's fiduciary rule, which was recently vacated by federal courts.) Most investors are unaware of the difference and the legal standards that apply to both. In the case of brokers, they are not fiduciaries, which means they do not have to act in the best interest of customers. Investment advisers, however, are fiduciaries and must always act in the best interest of clients. This may seem like a subtle distinction, but it's hugely important for investors that are not well-versed in the working of our securities markets.

In fact, SEC staff are often not aware of the status of their investment professionals. When I was on the staff of the SEC, I had a colleague that worked in the Division of Investment Management with me. She was aware of the distinction between brokers and advisers, but never asked her financial advisor about his legal obligations; she assumed he was an investment adviser because he used the term "advisor" to describe his role. When she finally asked him about it, he disclosed that he was not a fiduciary and was not obligated to act in her best interest, but of course, he would always do so for business reasons, not legal reasons. Unfortunately, he would probably sing a different tune if the parties ever ended up in litigation. Interestingly, he seemed bothered by her questions on the topic. I tell this story because if a sophisticated securities lawyer working at the SEC is not necessarily aware of her investment professionals obligations, what can we expect of mom and pop?

You can read more about the proposed rule in this Wall Street Journal Article: SEC Votes to Propose Stricter Broker Standards.

Fiduciary Investment Advisers SEC SEC Rule SEC Updates 1934 Act Advisers Act Brokers

Recent Posts

Topics

See all