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Regulating Broker-Dealers and Investment Advisers: Demarcation or Harmonization?

On May 5, Commissioner Elisse B. Walter presented before the Forum's Ninth Annual Policy Conference an address entitled, "Regulating Broker-Dealers and Investment Advisers: Demarcation or Harmonization?" According to Walter, the "Balkanized structure of financial regulation in the United States" is apparent in the regulation of financial professionals. And it is appropriate to address the gaps in the regulation of broker-dealers and advisers because they are subject to different regulatory regimes, yet provide very similar services to investors.

For the most part, broker-dealers and investment advisers are regulated under different statutes and at times by different regulatory bodies. Yet, they often provide practically indistinguishable services to retail investors and direct them to the same products. As Chairman Schapiro recently told Congress, "[The Commission is] studying whether to recommend legislation to break down the statutory barriers that require a different regulatory regime for investment advisers and broker-dealers, even though the services they provide often are virtually identical from the investor's perspective.
Walter described some of the history of the regulation of broker-dealer and adviser regulation, laying out the chain of legislative, regulatory, and judicial events giving rise to the current bifurcated regulatory regime, while the duties and activities adopted by broker-dealers and advisers over time blurred the line between the two.

Though admitting that legislation may be necessary to achieve this, Commissioner Walter's basic principle is that investors seeking advice from investment intermediaries should not be subject to two different levels, or at least different kinds, of protection based on whether they happen to be talking to an adviser or a broker-dealer. Rather, Walter and the Commission seek to fill the gap such that "regardless of the title held by the person sitting across the desk from [the investor], [he or] she will receive an appropriate and comparable level of protection."

Walter outlined two alternate approaches she feels the Commission could take to achieve her goal of consistent regulation of broker-dealers and adivsers and seamless protection from the perspective of investors: "demarcation" and "harmonization."

The first path would involve rulemaking to try to better distinguish broker-dealers and investment advisers—what I will call the "demarcation approach." The second path would involve rulemaking to harmonize to the extent possible the two regimes within the Commission's current authority—what I will call the "harmonization approach." Although to a certain extent both paths could be pursued simultaneously, I believe that the two approaches represent a fork in the road where the Commission should choose its route.
Though she plainly stated a preference for the "harmonization approach," the "demarcation approach" could be implemented either by "enhanced disclosure of the duties and obligations of broker-dealers and investment advisers to give an investor more information to inform his decision to hire a financial professional," or by drawing the regulatory distinctions between broker-dealers and advisers more sharply, thereby curtailing the scope of the advice that may be offered by a broker-dealer as opposed to advisers.

The "harmonization approach" could be implemented by:
Specifically, using current statutory authority, I believe the Commission should try to harmonize, among other things, the registration process, disclosure obligations, supervisory responsibilities, and recordkeeping requirements of broker-dealers and investment advisers. The Commission should also consider imposing a uniform standard of conduct on all broker-dealers and investment advisers, which is something I will discuss more fully in just a moment. Although such rulemaking may not be the complete solution to the problem, it would be a good start.
Finally, Commissioner Walter described a legislative alternative to harmonize fully the regulation of broker-dealers and advisers. Walter described this approach as:

Congress should throw both statutes on the floor, select what is best in each, and cover any holes through which the floor boards show. In doing so, Congress should look at every aspect of a financial professional's business, from the moment of its inception until its dissolution.
Specifically, it would require a reexamination, with regard to both advisers and broker dealers, of the

  • registration process,
  • licensing and continuing education requirements,
  • disclosure obligations,
  • SRO membership requirements,
  • Remedies when standards of conduct are breached, and
  • uniform standards of conduct and the parameters of fiduciary duty.
Commissioner Walter closed her remarks by inviting the audience to contact her if they would like to disucuss the options she described further.

The full text of Commissioner Walter's May 5, 2009 address is available at: http://sec.gov/news/speech/2009/spch050509ebw.htm