The so-called Dodd-Frank 913 study fails to call for greater ethical mandates for broker-dealers and misses the critical issue of regulating market-makers and their duties to retail customers.
An important element of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was reform of the broker-dealer industry, the implementation of strong new fiduciary standards, and enhanced transparency for retail investors.
Since the adoption of Dodd-Frank, the Securities and Exchange Commission has sought to enact rules that make this legislative mission a reality.
Publicly, the SEC has represented that Dodd-Frank rules and studies have remained true to the central purpose of the legislation through protecting investors and encouraging issuance of strong fiduciary standards. The SEC has assured investors that the new rules of the game are fair, transparent, ethical, and founded upon good governance.
For example, in the broker-dealer space, Carlo V. di Florio, director of the SEC Office of Compliance, Inspections, and Examinations, explained in a speech entitled "The Role of Compliance and Ethics in Risk Management" that the Dodd-Frank mandated 913 broker-dealer study is emblematic of how ethics can shape the new securities legislation and fiduciary standards in general:
"The manner in which the federal securities laws are illuminated by ethical principles was well illustrated by the Study on Investment Advisers and Broker-Dealers that the Commission staff submitted to Congress earlier this year pursuant to Section 913 of the Dodd-Frank Act," Florio remarked.
However, contrary to Florio's statements, the 913 study fails to adequately address key underlying issues surrounding broker-dealer fiduciary standards. The study does not call for greater ethical mandates for broker-dealers and misses the critical issue of regulating market makers and their duties to retail customers.
The 913 Study
Section 913 of the Dodd-Frank Act required the SEC to conduct a study on the effectiveness of existing fiduciary standards regulating the conduct of broker-dealers and investment advisors that provide personalized advice to retail customers.
On Jan. 21, 2011, the SEC issued its published 913 Study on Investment Advisers and Broker-Dealers. Specifically, the SEC recommended adoption of a new "uniform" fiduciary standard that would apply to both broker-dealers and investment advisors. The proposed standard is intended to supplement existing fiduciary standards under the Investment Advisers Act of 1940 and would read as follows:
"The standard of conduct for all brokers, dealers and investment advisers, when providing personalized investment advice about securities to retail customers… 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."