Why Has the SEC Treated Brokers Differently than They Treated CPAs?

I was fortunate to participate in a brainstorming conference held in Washington DC with a few dozen other industry thought leaders. Much of the discussion reflected on the evolution of the fiduciary argument. Indeed, over the years, we’ve seen advocates shift from viewing regulators as their Knight in Shining Armor to seeing a government that has turned to the Dark Side (obligatory Star Wars reference – and I promise it will be the last one). What caused this realization?
 
You would think the “incidental advice” rule in the 40 Act would be enough for the SEC to solve the dilemma of the fiduciary standard, a controversy stemming from the fact non-Registered Investment Advisers are allowed to skirt registration by calling themselves “advisors.” In a recent interview, (see “Exclusive Interview: Clark Blackman Says SEC Fiduciary Fix ‘Not Tough Stuff’; Proposed DOL Fiduciary Rule a ‘Band-Aid’,” FiduciaryNews.com, December 15, 2015), Clack Blackman II brought up something that not many may remember. In a nutshell, during the mid-1980s the CPA industry began exploring ways to offer financial planning services to its clients. The CPA firms didn’t want to be required to register under the 40 Act. They sought specific exclusion from this by asking the SEC to rule that their acting as a financial planner fell under the “incidental advice” rule of the 40 Act, precluding them from the necessity of registering. The SEC declined. Its answer, covered in SEC Release IA-1092 in part says:
 
"Section 202(a)(II) of the Advisers Act defines the term “investment adviser” to mean:
… any person who, for compensation, engages in the business.of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities…"

And with that, any CPA firm that desired to hold itself out as offering investment advice was required to register as an investment adviser with the SEC.
 
Fast forward several decades to today. The brokerage industry seems to have had the same innovative idea as the CPA industry did. Only, for some reason, the SEC hasn’t enforced its own rule regarding the provision of investment advice. For want of a single vowel, the broker industry appears to have seized upon the Holy Grail of loopholes. By referring to themselves as “advisors” rather than “advisers,” they have duped the SEC into believing their bread-and-butter business is merely “incidental” to their standard business model.
 
How does the SEC explain this inconsistency? We don't know because no major media financial reporter has asked the SEC this question. Why am I picking on the major media instead of the trade media? Because the major media prides itself on being "watchdog journalists" - the only organizations capable of investing the money and human resources required of investigative reporting. Is it they don't know this is worth investigating? Or is it something else?
 
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Kindest regards...
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Chris Carosa
Chief Contributing Editor


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Fiduciary News provides essential information, blunt commentary and practical examples for the ERISA/401k fiduciary, the individual trustee and the professional fiduciary. We do this through our website, our Twitter account (which provides direct links to fiduciary articles from our own site and other news organizations) and our LinkedIn Group (which offers a place for extended discussion in a wholly professional environment).  Chris Carosa, a well-respected speaker, author, investor and entrepreneur with more 25 years of experience in the trust and investment industry, serves as chief contributor. Fiduciary News is a product of Pandamensional Solutions, Inc.
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