Christine Lazaro’s article, The Future of Financial Advice: Eliminating the False Distinction between Brokers and Investment Advisers, appears in the recently published St. John’s Law Review symposium issue that memorializes the Revolution in the Regulation of Financial Advice: The U.S., the U.K. and Australia symposium. Christine Lazaro is the Director of the Law School’s Securities Arbitration Clinic. Professor Francis “Jay” Facciolo, Assistant Director of the clinic, contributed the introduction to the volume. Both Facciolo and Lazaro chaired the symposium’s organizing committee.
Here’s an excerpt of Facciolo’s introduction:
This Symposium brought together legal academics, practicing lawyers and business people to discuss new directions in the regulation of financial advice to retail investors. Recently, this has been the subject of many initiatives around the world. The Symposium examined three of these initiatives in the United States, the United Kingdom and Australia. In the U.S., the approach historically has been based on disclosure to manage conflicts of interest. Although the U.K. and Australia have not done away with disclosure, they have moved to banning certain practices, especially in the area of compensation to investment advisers from product providers that can result in conflicts of interest between an investment adviser and its clients.
Here’s an excerpt of Lazaro’s article:
The individuals who effectuate securities transactions and offer financial advice to the public are regulated at several levels – by federal statute, by state law, and by rules of federal regulators, including the Securities and Exchange Commission (“SEC”) and self-regulatory organizations. Following the stock market crash of 1929, Congress began to enact a federal framework of regulation of the securities markets and the individuals working within the securities markets. Initially, Congress focused on brokers, the individuals who were paid to effectuate securities transactions. Next, Congress focused on investment advisers, the individuals who were paid for the advice they gave in connection with securities transactions.
The SEC is responsible for implementing the regulatory schemes for both brokers and investment advisers. The SEC directly regulates investment advisers. Brokers are indirectly regulated by the SEC and primarily regulated by the Financial Industry Regulatory Authority (“FINRA”), one of the self-regulatory organizations for which the SEC has oversight responsibility.
The regulatory schemes associated with the SEC and FINRA are separate and distinct. The standard of care applicable to brokers is limited in scope and time to the transaction they are effectuating. Pursuant to rules promulgated by FINRA, brokers must make suitable recommendations to their clients, execute orders promptly, disclose certain material information, charge prices reasonably related to the prevailing market, and fully disclose any conflict of interest.
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