Investor protection disclosure requirements for broker-dealers take effect on July 22nd, according to the National Council of Financial Fiduciaries, a Potomac, Maryland-based organization of financial advisors promoting a client-first approach to financial advice.
Part of the new SEC regulations, “Certain Broker-Dealers Deemed Not To Be Investment Advisors,” requires that broker-dealers who claim an exemption from the Investment Advisors Act and its fiduciary standards must disclose that their interests may diverge from their clients. Broker-dealers have previously been exempted from investment advisor registration and disclosure rules when their advice has been “solely incidental” to their broker-dealer role.
The new rule requires that any broker or broker-dealer claiming an exemption from the fiduciary standards of the Investment Advisor Act must assure that ” … all customer documents contain a clear, prominent statement as follows:
‘Your account is a brokerage account and not an advisory account. Our interests may not be the same as yours. We are paid both by you and sometimes by people who compensate us based on what you buy ….'”
Harold Evensky, a founding National Council of Financial Fiduciaries (NCFF) board member noted, “This new disclosure rule is a vital step towards reinforcing the sharp historic and legal difference between a SEC registered investment adviser and a NASD registered broker. The key difference is not compensation or the number of regulations in place. It’s much more. A broker and an adviser have fundamentally different responsibilities and jobs, based in law. Brokers owe loyalty to their firm, and their job is selling investment products and executing transactions. An investment adviser, on the other hand, provides advice and, by law, must put his client’s interests first. He owes his loyalty to his clients. This difference is stark, not unlike the difference between your friendly butcher in the corner grocer and your dietician. Each can be helpful, but each has a very different job to do.”