CFA Institute, charter to 150,000 fiduciaryinvestment professionals globally, is calling on the Securities andExchange Commission to take immediate regulatory action that wouldprohibit non-fiduciary investment brokers from holding themselvesout as investment advisers.

In a recent comment letter to the SEC, the Institute raises thelong-standing and controversial practice of brokers operating underthe title of “investment adviser” without registering as afiduciary with the SEC.

Brokers registered with FINRA are held to a suitability standard whenrecommending an investment, a lower threshold of care than thefiduciary best-interest standard that registered investmentadvisors are held to. The SEC registers and regulates RIAs underthe Investment Advisers Act of 1940.

“Clarifying the definition of 'investment adviser' containedwithin the Advisers Act is an important first step the SEC couldtake toward ensuring that those acting as advisers must in factregister as such,” CFA said in its comment letter.

The SEC has been accepting comment letters since last Juneregarding plans to promulgate a new uniform fiduciary standard. TheWall Street Journal has reported that a proposal could emerge asearly as the end of the second quarter this year.

In the meantime, enforcement of the Labor Department's fiduciaryrule, and most of its new disclosure requirements designed toprohibit conflicted advice on qualified retirement accounts, hasbeen delayed until July 2019.

The Labor Department has requested input from the SEC as itconsiders potential revisions to the fiduciary rule. Opponents ofLabor's rule have long argued that the SEC is better equipped towrite a uniform fiduciary standard, and are urging both agencies tocraft a harmonized rule that would address standards of care on allinvestment recommendations, whether they're inside qualifiedretirement accounts or not.

While the SEC has clearly prioritized crafting its own fiduciaryrule, the process has the potential to be drawn out under theAdministrative Procedure Act's rulemaking requirements. Craftingthe Labor Department's fiduciary rule took more than fiveyears.

The CFA Institute supported Labor's rule, and supports the SEC'sintention to issue its own set of standards.

But it also says the SEC has the legal authority to issueregulatory guidance in the near term that would address investorconfusion over the different standards that brokers and advisorsare held to.

Specifically, the CFA is calling on the SEC to clarify thedefinition of “investment adviser” in the Advisers Act, to includeany broker that provides personalized investment advice.

“We believe that titles suggesting personalized investmentadvice, such as 'financial adviser,' regardless of how they areused or spelled, should be reserved in the world of investmentservices solely for those who are RIAs under the Advisers Act,”writes CFA.

The Advisers Act includes a so-called incidental exclusion,which many fiduciary advocates say has allowed brokers to marketthemselves as investment advisers without registering asfiduciaries with the SEC.

In 2005, the SEC promulgated a rule that attempted to addressthe relationship between professional titles and fiduciary status.The rule determined “investment advisor” and “investmentconsultant” were generic terms. The rule did not limit brokers fromusing those titles without registering as fiduciaries.

Critics charged it was weakly written. The 2005 rule wasultimately overturned in a lawsuit.

Since then, the SEC has been quiet on the question of titlingand fiduciary status, which has led to the abusive claim of theadviser title, argues CFA Institute.

“We believe brokers are providing personalized investment advicethat is intended to influence the investment decisions and actionsof specific individuals or accounts,” the Institute argues. That inturn has blurred the roles of brokers and fiduciary advisers in theminds of investors.

Legal authority

Beyond clarifying the definition of investment adviser, CFA saysthe SEC can issue new guidance on the Adviser Act's incidentalclause.

The 2005 SEC rule included an exemption for brokerage firms thatcharge asset-based fees without registering as fiduciaries.

The U.S. Court of Appeals for the District of Columbiaoverturned the rule on the grounds that the SEC exceeded itsauthority in granting that exemption.

Notwithstanding that decision, CFA Institute says the SEC hasthe authority to issue guidance clarifying the definition ofinvestment adviser and limiting how the Adviser Act's incidentalclause is interpreted.

“It is our view, based on the advice of outside legal counselthat CFA Institute sought on this matter, that the SEC has thelegal authority to clarify what constitutes 'incidental' under theIncidental Exclusion through administrative guidance,” writesCFA.

Brokers transacting sales of investments have a role in theretail market, CFA says.

But doing so under the guise of a fiduciary investment adviserexceeds a reasonable interpretation of the Advisers Act.

“These practices not only violate the Advisers Act on its face,but violate the principles of providing investor protection,”argues CFA.

“It is clear that brokers who imply the provision of advice bycalling themselves financial advisors in what is a salesrelationship are misleading investors about the nature of theirrelationships,” according to CFA's comment letter.

Issuing new administrative guidance could take a fraction of thetime it will to write a new fiduciary rule.

By limiting non-fiduciary brokers from claiming the title ofinvestment adviser, the SEC could address potential conflicts ofinterest long before final rules emerge from the SEC and LaborDepartment, according to CFA Institute.