Deadlock: Why the SEC’s Stalled on a Fiduciary Standard for Brokers

Commissioner Gallagher, on the other hand, takes a more scholarly view, as we see in his keynote address to the National Society of Compliance Professionals, on Oct. 23, 2012:

"In order to address harmonizing our rules—imposing conduct requirements on brokers with our rules that do the same for investment advisers—we need to understand not just the present state of affairs, but also how things came to be the way they are—the evolution of law, regulation and market practices. It's important to understand the reasons why Congress decided over 70 years ago to regulate investment advisers through the Investment Advisers Act of 1940, which was separate and distinct from the Securities Exchange Act of 1934 that established a regulatory framework for brokers and dealers…

"Aside from its registration provisions, the Advisers Act shared little in common with the regulatory regime then applicable to broker-dealers. Notably, Congress explicitly exempted from the Advisers Act brokers who provided investment advice that was merely incidental to brokerage transactions for which they received only brokerage commissions… …The convergence of the roles of brokers and investment advisers has led to calls for new efforts to harmonize the two regulatory regimes, as exemplified by the new mandates and regulatory authority set forth in Section 913 of Dodd-Frank. As we review today's landscape and consider whether and to what degree to harmonize the broker-dealer and investment adviser regulatory regimes, however, we need to be cognizant not only of the very different histories of those regimes… …we should bring to bear our historical experience and approach the subject with a certain regulatory humility that places our efforts in the context of eight decades of securities regulation."

Some readers may know that I'm a big fan of history: especially the importance of understanding how and why we got to where we are now. Yet you don't have to study history very long to realize that failing to realize when things have changed is equally as bad a mistake as being historically ignorant.

As Commissioner Gallagher notes, it's the "convergence of the roles of brokers and investment advisers that has led to calls for new efforts to harmonize the two regulatory regimes…." It's also the convergence of these roles that has led to unprecedented confusion among retail investors.

We certainly need to recognize the importance of both the sales and advisory roles in financial services. But it's equally important to recognize the harm to investors caused by the blurring of the lines between those roles. Investors need to be able to easily and clearly understand when they are being "advised," and when they are being "sold."

As Knut Rostad once told me: "Investors shouldn't need a lawyer to understand what their broker is required to do for them."

Perhaps the nominees for the SEC put up by President Obama, who signed the Dodd-Frank Act into law, will turn out to be fiduciary advocates who can break the stalemate that has prevented the SEC from fulfilling its Dodd Frank mandate.