In Perfect Harmony

With the enactment of Dodd-Frank, all financial firms should be expecting new regulations and oversight guidelines from the regulators. In some cases, firms may have to report to new sets of regulators.

Due to the economic crisis and the Madoff Ponzi scheme, the SEC is in the process of proposing new rules and policies. These rules will focus on uniform fiduciary standards for Investment Advisory firms, as well as Broker Dealers and their agents and advisors. The new rules will also focus on harmonizing regulatory protection for investment advice clients.

The Broker Dealer Fiduciary Shift

One of the most significant shifts that will affect all securities firms is the potential requirement for all broker dealers to establish a fiduciary relationship with their clients. The Investment Advisers Act of 1940 imposed the fiduciary duty on all investment advisers and IA firms. However, broker dealers have not historically been required to maintain a fiduciary relationship with their clients — though courts have recognized the relationship under certain circumstances, such as when a broker exercises discretion or control over customer assets.¹

Based on a study conducted by the SEC,² it was concluded that retail customers are confused by the roles of both Investment Advisory firms and Broker Dealer firms. Furthermore, retail customers were unable to recognize the difference between IA and BD firms, or between their respective advisors and agents. The Commission believes that imposing a new rule structured to balance fiduciary standards across both firm types will address most of the concerns raised by retail customers.

Once this rule is finalized, broker dealers can expect new requirements dealing with full and fair disclosures, conflicts of interest, principal trading, suitability, continuing education, and recommendations for "personalized investment advice."

The SEC's Asset Management Unit

Look out for more regulations and investigations coming down the pipeline for all financial institutions. The SEC has developed an Asset Management Unit focused specifically on investment companies and investment advisers. This Unit's focal points include the level of transparency, fraudulent valuation processes, investments shifting from the investor's initial goals, funds that are consistently outperforming the market, and misrepresentation of adviser experience.

"Now that transparency of operations and putting customers' interests first is the top priority among regulators, promoting a culture of compliance is extremely important."