By broadening securities law to allow broker-dealers to offer advice and charge for it, the Securities and Exchange Commission’s best-interest violates the Investment Adviser’s Act of 1940 and more recent court rulings, Michael Kitces, president of the 700 advisor firm XY Planning Network, argued in a comment letter he sent to the agency this week.

“Regulation Best Interest as proposed would appear to violate the existing 'broker-dealer exception' under the Investment Advisers Act of 1940,” said Kitces, also principal of the Maryland-based Pinnacle Advisory Group, an independent registered investment advisor.

The ’40 Act provides only a very specific and narrow scope for broker-dealers to avoid offerings that may be construed as “advice” that would trigger a requirement to register as an investment advisor and a fiduciary, Kitces argued.

Kitces makes the case that the SEC simply doesn’t have the authority to expand broker-dealers’ ability to offer advice.

To preserve consumer choice when creating a fiduciary standard for those who do offer advice, Congress specifically carved out an exception for broker-dealers that stated that the investment advisor term did not include: “…any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation,” said Kitces.

Incidental advice occurs either by chance, as a consequence of product sales or without intent to give advice, argued Kitces.

While the brokerage industry believes the SEC’s proposal goes too far in hamstringing their advice offerings, Kitces asked, if broker advice should be a free and incidental consequence of broker-dealer product sales, why does the SEC repeatedly characterize its broker proposal as a “model for advice?”

“In violation of the ‘40s Act, the SEC’s Regulation Best Interest repeatedly characterizes the broker-dealer model as a ‘model for advice,’ variously calling it a ‘pay as you go’ model for advice, suggesting that preserving the broker-dealer model is about 'preserving investor choice across products and advice models' and advocating for 'continuing existence of the broker-dealer model as an option for retail customers seeking investment advice,'" said Kitces.

“The very announcement of the proposal itself by Commissioner Clayton stated: “The specific obligations of investment advisers and broker-dealers would be, however, tailored to the differences in the types of advice relationships that they offer,” Kitces noted.

“Clearly, declaring broker-dealers as a model for advice directly violates the plain language of the narrow, solely incidental exception, which FPA vs SEC already noted that the SEC does not have purview to expand,” Kitces added.

First « 1 2 3 » Next