Dodd - Frank and Fiduciary Duty - Investment Advisors and Broker/Dealers

The Dodd-Frank law touches nearly every business in financial services.  As such, the regulatory environment for the financial services industry as a whole is greatly impacted, yet broker/dealers and investment advisors stand to be especially impacted.  The new regulations, once finalized, will force a drastic shift in business practices, regulatory activity and litigation exposure.  Compliance will be complex and require leveraging existing systems, rationalizing data, improving transparency, and enhancing reporting to meet the compliance demands while keeping costs in line.

Meeting the compliance hurdles is essential, but also poses opportunities.  Firms will have a unique opportunity to not only be in compliance but to enhance business processes out of the work performed.  Along with simplifying processes and delivering better information, firms can improve business procedures at the same time.  Getting a good grip on information can lead to better decision-making, thus creating true value for organizations.

Earlier this year, the SEC staff’s study recommended that the SEC establish a uniform fiduciary standard for broker/dealers and investment advisors when providing investment advice to retail customers.  While the study recognizes the distinction between broker/dealers and investment advisors business models it recommends that future rulemaking focus on assisting broker/dealers with complying with the minimum requirements of the uniform fiduciary standard.  This leads to enhanced disclosures as facilitated by the SEC.

In addition it highlights principal trading activities and makes recommendations around the harmonization of regulations around advertising, use of solicitors, supervisory requirements, licensing and registration of firms and books and records. 

The SEC will determine whether to implement new rules and regulations, which stand to completely alter the way broker-dealers and investment advisers operate:

• How a universal fiduciary standard applied to both broker-dealers and investment advisers would change the financial landscape
• What steps entities must take in preparation for a new standard of care
• How the broker-dealer business model will be altered
• To what extent investments would need to be monitored – at the time of the transaction or continuously?
• The effects of a universal fiduciary standard on retail and institutional investors

Firms in the investment industry will have to undergo a transformation of their business to compete.  This includes modifying their business models and other components of their business such as organizational processes, product development and marketing practices in order to remain competitive in the regulatory framework.