Academic journal article Journal of Corporation Law

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

Academic journal article Journal of Corporation Law

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

Article excerpt


This topic is actually not as far afield from your conference topic as it might appear at first blush. Successful litigation always depends on a party having violated some statute, rule, duty, or standard of conduct. I hope, therefore, that my remarks today, which lay out my evolving views on the regulation of financial professionals, will be of interest to you. Please keep in mind, however, that my remarks today represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1


I would like first to take a step back and put the question of broker-dealer and investment adviser regulation into the broader context of recent discussions of regulatory reform, and also to provide some historical background. The current securities regulatory framework in the United States was enacted by Congress in the 1930s and '40s; it is now a patchwork quilt-and a badly worn one at that. Although I am continually amazed at how well our securities statutes have done their job over the decades, when you look closely at the full fabric of our regulatory system, it is apparent, although not shocking, that there are gaps and overlaps. Some of the decisions made more than a half century ago are no longer ideal. There are important products and market actors, such as hedge funds and much of the over-the-counter financial derivatives market, that are beyond effective oversight by regulators. Other products and market actors are subject to regulation by a myriad of federal and state bodies, whose divided and sometimes unnecessarily overlapping jurisdictions create inefficiencies. Addressing these gaps and overlaps is high on the Commission's agenda, both by working with Congress to draft appropriate legislation and through the exercise of its current rulemaking and interpretive authority.

The Balkanized structure of financial regulation in the United States is apparent in the regulation of financial professionals. I am going to focus my attention in this speech on broker-dealers and investment advisers because they are-with a few notable exceptions-subject to the Commission's jurisdiction. Of course, the gist of what I am going to say would apply equally well to other financial professionals, regardless of their primary regulator.

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."2

Before I go too much further, let me review a little background. In the Investment Advisers Act of 1940 (Advisers Act), Congress defined an "investment adviser," in part, as "any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in . . . securities."3 A variety of people and entities that provide investment advice as they carry out their other professional activities, such as banks, lawyers, and publishers, are excepted from this definition.4

Congress also included an exception for broker-dealers. Specifically, the Advisers Act excepts from the definition of an investment adviser any broker-dealer whose provision of investment advice is "solely incidental" to the conduct of its brokerage business and who receives "no special compensation," which refers to an asset-based or fixed fee rather than commissions, markups, or markdowns.5 As former Commissioner Annette Nazareth noted: "This now longstanding exception to investment adviser regulation recognized both that broker-dealers were already comprehensively regulated and that there was a natural interrelationship between brokerage and providing information and advice about investments. …

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