Skip to content

How the SEC Has Strayed From Its Mission

In case you missed it, the XY Planning Network—Michael Kitces and Alan Moore—have filed two petitions with the SEC, and they’re far more ambitious in what they’re asking for than anything I’ve seen from our trade or professional organizations.  In fact, they make the case that the SEC has totally perverted its consumer protection mission, which is clearly spelled out in the law, for at least the past 20 years. 

If the petitions get traction, it could bring about huge shifts in the regulatory playing field for fiduciary advisors and Wall Street—and benefit financial consumers perhaps most of all.

One of the XYPN petitions asks the SEC to greatly expand on its 2018 proposal to limit what brokers and registered reps are allowed to call themselves if they continue to refuse to register as RIAs and avoid bringing themselves under the fiduciary regulatory structure.  That 2018 proposal suggests (but doesn’t mandate) that brokers be forbidden to describe themselves using the terms “advisor” or (the SEC’s quirky spelling) “adviser.”  The petition notes that the SEC, in response to litigation from the Financial Planning Association back in 2005, had proposed to go further, and require anyone holding themselves out as a “financial planner” or providing “financial planning services,” or delivering a financial plan to their customers, be required to register as an RIA. 

Of course, this was never finalized.  Then came Reg BI, in 2019, where the Commission decided that adopting a separate rule restricting these terms was ‘unnecessary.’

If I read the petition right (and I think I do), it is asking the SEC to prohibit any title that suggests to the consuming public that the broker or rep is acting primarily in an advice capacity—until and unless that broker or rep registers as an RIA and puts him/herself under the obligations of a fiduciary standard.

This first petition also touches on dually-registered individuals, recommending that, if they hold themselves out as advisors, they be required to disclose precisely when their work as an advisor ends and their efforts to effect a sale begins—something that is far from clear in current client engagements.

The second petition asks the SEC to stop pretending that giving financial/investment advice is “solely incidental” to the current wirehouse business model.  It says that the current regulatory scheme allows broker-dealer reps and brokers to hold out as providing identical financial planning services as SEC-registered RIAs, and deliver an identical financial plan to clients, and receive identical fees, yet be subject to a lower (suitability) standard of care.  “By clearly (re-)defining ‘solely incidental’ in Sec. 202(a)(11)(c) of the Advisers Act,” the petition says, “the Commission can increase investor protection by (re-)asserting a distinction between product sales and stand-alone investment advice.”

Once again, dually-registered individuals receive consideration.  The petition recommends that the fiduciary standard should apply to every recommendation associated with every client relationship whenever the rep is SEC-registered; that is, the fiduciary standard should cover any subsequent ‘implementation’ of that advice (i.e. sales) after the initial advice has been delivered.  Dually-registered advisors would only be able to wear one hat.

This second petition includes some draft language that the SEC could adopt, which spells out that a broker should be required to either register its reps with the SEC or stop calling those reps advisors, financial planners, wealth managers etc. The list of things that would trigger the requirement to register also includes the delivery of a financial plan, holding out as providing advice or holding out in any way (presumably including advertisements) that indicates the offer of holistic financial advisory services.  It says that the fiduciary duty covering investment advisors would apply to the entire advisor-client engagement, and arise as a matter of law whenever an investor gives an RIA his/her trust and confidence.

Both petitions are signed by Michael Kitces in his capacity as Executive Chairman and Co-Founder of the XY Planning Network.

Historical precedent

I know that some of you are shaking your heads, and mumbling something like: “Yeah, I’ve heard all this before, and you know what?  The regulators aren’t going to do diddly, except, perhaps throw these petitions in the circular file before they’re taken to expensive lunches by Wall Street executives.”

I mumbled something like that myself when I read the simplistic accounts about these groundbreaking petitions in the trade press, which all XYPN’s latest initiative seem like one more quixotic, doomed-to-fail appeal to the (nonexistent) better angels of the SEC’s nature.  But after reading the petitions, I find it hard to poke holes in their logic.  The points they make are a striking contrast to the blatant cynicism of the Reg BI initiative.  Is it possible that the SEC has overreached, and made clear what was not clear before: that it’s deliberately subverting the language and intent of the Investment Adviser’s Act of 1940?

To understand how, we need to back up a bit.  I’ve written elsewhere that the entire rationale for the 1940 Act was to protect the public—and the reputations of consumer-focused advisors—from the marketing encroachments of the financial sales industry.  The minutes of the Congressional Committee, back in 1939, when the Act was being formulated, directly mention how touts and tipsters should prevented from posing as honest advisors.  The whole premise of the legislation that forms the foundation of the SEC’s regulation of the financial services marketplace is in direct agreement with the XYPN petitions.

On his website ( Kitces provides a historical tour of the thinking behind the foundational document that is the ’40 Act, which illustrates how far the SEC has gone to ignore its basic premises.  (You can find another history tour here:   

Among the highlights:

-In the aftermath of the 1929 stock market crash and well into the 1930s, brokers, touts, tipsters and other salespeople fell into great disfavor with the general public—perhaps due to millions of dollars of losses and rampant fraud in the investment trust industry.  Those who could afford it increasingly turned to investment counselors (that was the equivalent of ‘financial planner’ in that era).  Before long, the banks, brokerage firms and investment trusts decided that they would adopt this popular, trust-enhancing term for their sales agents.  (Does any of this sound familiar about today’s marketplace?)

-The Investment Counsel Association of America (now the Investment Advisers Association) testified before Congress that their fee-only approach to providing objective financial advice needed to be protected by a regulatory framework, else the public would be misled (and ultimately damaged, the way they were during and after the market crash) by the tipsters, frauds and touts.  Congress subsequently passed the 1940 Act, and its committee report states (as I’ve pointed out in the past) that the legislation’s purpose was “to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment advisers against the stigma of the activities of these individuals.”  (An interesting contrast to how the SEC operates today, no?)

-The core purpose of the ’40 Act was to separate sales from advice, but to do this without interfering in forthright (and entirely legal, if sometimes shady) sales activities conducted by the banks and brokerage firms.  The sales agents could continue to sell, so long as they didn’t try to convince their customers the they were in the advice business.  This meant that they could tell their customers what to buy (which is, of course, a form of advice) but they had to stay on the far side of a bright line.  The ’40 act chose to call that bright line ‘solely incidental,’ as in: the advice to buy this product the salesperson is selling is incidental to the business of selling, and the broker forthrightly earns a commission, and does not charge for the advice. 

The ’40 Act states (remember the petition’s reference to Section 202(a)(11)(c)?) that brokers or dealers would be exempted from investment adviser registration if they provided advice that was “solely incidental to the conduct of his business as a broker or dealer and… receive no special compensation thereof.”  (So if a broker collects AUM fees, or advisory fees, isn’t that ‘special compensation’ related to advice?  When a brokerage firm’s TV ads talk about providing advice in the best interests of the client, without any mention of product sales, does that sound like that is a ‘solely incidental’ service?)

-In 1960, Congress enacted Section 208 of the ’40 Act, which makes it unlawful for someone “to represent that he is an investment counsel or to use the name ‘investment counsel’ as descriptive of his business unless: 1) his or its principal business consists of acting as investment advisers; and 2) a substantial part of his or its business consists of rendering investment supervisory services” (i.e. giving advice on managing a client portfolio).  [Note the term ‘his’ throughout.  Apparently it was unthinkable, at that time, that a woman would be a broker.]

Of course, today nobody calls themselves an ‘investment counselor,’ but it is not hard to read the intent of Congress—to stop brokers and reps from appropriating titles that imply that they are in a business other than sales, and that they are so representing to the client when they are, in fact, obligated in exactly the opposite direction: to serve the best interests of their brokerage employer.

Kitces notes that after the Mayday (May 1, 1975) elimination of fixed commissions, brokerage firms had to reinvent themselves and their business model, to shift from stock and bond trading to getting paid to distribute products.  Suddenly every broker was calling him/herself a financial advisor, and appropriating the trust that real advisors had been building with the public.  (Is ‘stealing’ a better way to describe it than ‘appropriating?’) 

From there, Kitces offers a brief tour of the history you’re familiar with: how the SEC started softly sneaking away from the core principles and plain intent of Congress codified in the ’40 Act, until finally it found itself squarely on the opposite side of the table with Reg BI, where brokers and advisors are essentially considered interchangeable in the eyes of the regulators. 

To illustrate the absurdity of this position (especially in light of the history of the ’40 Act), Kitces offers a hypothetical example of how two ‘advisors’ both deliver financial plans to their clients, and both receive 1% AUM fees.  One creates a portfolio of thrifty ETFs and bills the client’s account directly, owing total loyalty to that client’s best financial interests.  The other earns that compensation in the form of a 1% C-share trail from one or more of his company’s high-cost proprietary mutual funds, giving total loyalty not to the client, but to the broker’s employer. 

They’re the same, right?

The article contains an interesting chart, which maps out, on a grid, the results of surveys of customer loyalty (X axis, going across) for different professions, and how competent consumers perceive them to be (Y axis going up), which produces a graph that looks a lot like the traditional risk/return space.  As you can imagine, car salespersons and politicians are on the lower left quadrant (not good), and doctors enjoy a space in the upper right quadrant (high loyalty, high perceived competence). 

The point here is what’s in the middle.  People who call themselves financial planners, financial advisors, financial counselors, investment consultants and investment advisors are all further up and to the right than stockbrokers, investment salespeople and life insurance agents. 

No wonder Wall Street coopted those former terms and abandoned the latter ones.  They took the trust built up by the fiduciary advisor profession and used it to give unearned credibility to their sales agents and reps.  It’s fundamentally a form of thievery, sneakily, then openly, now brazenly sanctioned by the SEC.

And…  Is this not exactly what the Investment Advisers Act of 1940 was created to prevent?

The two petitions, and Kitces’s article, toss the ball into the SEC’s court, and basically ask the SEC to live up to its mission of protecting the public under the legal guidelines provided by Congress, who saw this very encroachment 60 years ago and sought (so far, in vain) to create a regulatory structure that would forestall and prevent it.

If you have contacts in the press, I recommend that you point to the petitions, the Kitces article and this summary as a way to help the press recognize that an actual outrage has been perpetrated on unsuspecting consumers—by the very people who are charged with protecting them from it.