Brokers as Investment Advisers?


New York – One of the very serious land mines facing the brokerage industry today is the ongoing legal debate about whether or not brokers, under some conditions, must comply with the Investment Advisers Act of 1940. The first round has gone to the Financial Planning Association in its suit against the SEC stipulating that the SEC overstepped its bounds in its decision to exempt fee-based brokerage accounts from registering advisers.

SIFMA is encouraging the SEC to appeal this decision. Currently, brokers largely avoid much of the onerous regulation that investment advisers and money managers are held to.  Brokers are, among other things, expected to provide best execution, are prohibited from “aiding and abetting” money managers and are obligated to keep accurate records regarding their transactions.

If the brokers are held to the investment adviser criteria, they will be deemed to be fiduciaries and will need to adhere to much stricter regulations under the Investment Advisers Act of 1940.  In particular, the investment adviser owes more than honesty and good faith alone.  Rather, according to SEC vs. Galleon Capital Management, “the investment adviser has an affirmative duty of upmost good faith to act solely in the best interests of the client and actions of an investment adviser that are not in the clients best interest are generally improper”.[1]

Of course, SIFMA is positioning this ruling as hurting investors by reducing the choices offered to retail investors.  Should the SEC not appeal or appeal and lose the appeal, it seems quite clear to us that brokers will drop fee-based accounts altogether.

Meanwhile, SIFMA is advising its members that the decision at least temporarily leaves the fee-based brokers exposed until the news rules and/or final judgment are rendered.

We include the url to the SIFMA notice:

[1] Soft Dollars and Other Brokerage Arrangements, Thomas Lempke and Gerald Lins, 2007 Edition, Thomson/West


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