NASAA Issues Statements on SEC Recommendations Regarding Investment Advisers and Broker-Dealers (with Lofchie Comment)

NASAA issued two statements regarding the SEC's Investor Advisory Committee's ("IAC") recommendations on SEC investment adviser exam funding and on the fiduciary duty for broker-dealers.

In short, NASAA favored increased funding to allow the SEC to conduct more examinations of investment advisers. NASAA also supported imposing a fiduciary obligation on broker-dealers that provide personalized advice.

Lofchie Comment: Both of NASAA's statements raise important policy considerations, and ought to illustrate the difficulty of obtaining a benefit that is cost-free.As to NASAA's recommendation that the SEC be given more funding to examine investment advisers, the need for such a significant amount of new funding demonstrates that the additional consumer protections promised to investors by requiring the registration of more investment advisers under Dodd-Frank was largely illusory. The recommendation is an admission that the SEC does not have the resources to supervise the advisers registered with it.The reason for the registration of large hedge fund advisers is that their investment decisions and transactions are of sufficient size that they may have some effect on the national economy and thus it makes sense to monitor their activities from a systemic perspective. However, it does not make sense to register hedge fund advisers for the purpose of protecting their customers, particularly if it means that less affluent investors who are served by smaller investment advisers do not obtain the same SEC protections. It would be as if we imposed safety standards on luxury vehicles but not on low-end cars. As to NASAA's recommendation that broker-dealers be subject to a fiduciary duty standard, neither NASAA nor any other advocate for this standard seems willing to acknowledge its costs. Assuming that the standard requires additional investment by broker-dealers in serving small customers, the end result will be either to raise the costs to these customers or to prevent them from receiving any personalized advice. These outcomes may in fact be desirable (one can argue either way on these points), but there cannot be any meaningful debate of the issue unless these costs are acknowledged.

See: NASAA Statement on Investment Adviser Exam Funding; NASAA Statement of Support for Fiduciary Duty for Broker-Dealers.