Securities and Exchange Commission Finally May Clarify The Different Rules That Apply to Investment Advisers and Broker-Dealers


March 1, 2013:  The SEC has issued a request for information ( /2013-32.htm) to help the commission determine whether or not to enact new rules and regulations defining the respective rules and duties of investment advisers and broker-dealers who deal with retail customers.  KKBS has handled a large number of cases involving both investment advisers and broker-dealers, and sometimes both in the same case, and the role of the adviser is often unclear and confusing.  Indeed, many retail customers refer to their broker-dealers as their financial advisors.  Many retail brokers have titles such as “Senior Financial Adviser” or something to that effect.   In my experience, financial advisers are often employed by both a “broker-dealer” and a “registered investment adviser,” and it is often very challenging to know when they are acting as a broker and when they are acting as an investment adviser.

The distinction is important.  Although the SEC does have authority over them, Broker-dealers are directly regulated and licensed by the Financial Industry Regulatory Authority (“FINRA”),, whereas, investment advisers are regulated and registered directly by either the State’s securities regulator or the SEC.   Broker-dealers tend to be in the business of selling securities (stocks, bonds, mutual funds, etc.), whereas investment advisers do not sell securities.  Instead, investment advisers manage their client’s assets, buying and selling securities on behalf of their clients based upon a plan.  Investment advisers usually interact with broker-dealers on behalf of their clients.

Broker-dealers are subject to FIRNA’s rules of conduct, including the “suitability rule” and other rules that are designed to protect investors.  Investment advisers are subject to the Investment Advisers Act of 1940 and the related regulations established by the SEC.  It is generally accepted that investment advisers owe a fiduciary duty to their clients, which is the highest duty recognized by the law.  Broker-dealers owe their clients a fiduciary duty as well, but the breadth of the duty varies depending upon the relationship between the broker and the client.  For example, if the broker-client agreement provides the broker with fully discretionary authority to “manage” the client’s account, including buying and selling securities, without the client’s consent for each transaction, the broker will likely be found to have a broad fiduciary duty to the client, similar to an investment adviser.  On the other extreme, if the broker is merely an order-taker, as may be the case at a discount brokerage firm, then the duty may be very limited.   Therefore, it is incumbent upon the SEC to clarify the role of the adviser as either a “broker-dealer” or an “investment adviser” so that the client investor knows what duty is owed and what rules apply.

If an investor is unsure whether his or her adviser is a broker-dealer or a registered investment adviser, they can check on FINRA’s website, at   Simply enter the adviser’s name to search.  FINRA will report whether they are a broker-dealer, investment adviser or both.

By Vincent D. Slavens, partner.  Mr. Slavens can be reached at 619-232-0331;