Burns Dual Registration White Paper

On April 6, 2016, the Department of Labor (“DOL”) announced its final “conflict of interest” rule
which expanded the definition of fiduciary to include “any person who provide[s] investment
advice or recommendations for a fee or other compensation with respect to assets of a plan
or IRA.”1
As reflected by the rule, the line between registered investment advisers (“Advisers”)
and broker-dealers (“Brokers”) has become blurred.2
Historically, Advisers had a fiduciary duty
to their clients to act in the client’s best interest.3
In contrast, Brokers were only required to
ensure that their recommendations met a suitability standard, in that the recommendation
would be suitable for an investor based on factors such as investment goals, income and risk
tolerance.4
Under the DOL’s fiduciary rule, however, “brokers and dealers could be considered
fiduciaries when they provide recommendations to participants in retirement plans.”5
The rule reflects a growing movement in the regulatory sphere to delineate the duties
required by Brokers who are dually registered as Advisers or who perform advisory services.
This whitepaper provides an overview of the differences between an Adviser and a Broker, the
frictionpointsofbeingduallyregisteredasboth,andtherisksandbenefitsofdualregistration.
Characteristics of an Adviser vs. Broker
The line between Advisers and Brokers has become blurred, largely due to a growing number
of registered persons acting in both capacities. The definitions of an investment adviser and
broker offer little help in differentiating the two positions. An “investment adviser” is defined as
“any person who, for compensation, engages in the business of advising others, either directly or
through publications or writings, as to the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as part of a regular business, issues
or promulgates analyses or reports concerning securities.”6
In comparison, a “broker” is defined
as “any person engaged in the business of effecting transactions in securities for the account of
others.”7
While the definitions may seem similar, there are important differentiations between an Adviser
and a Broker. First, Advisers and Brokers are regulated under different laws, with Advisers primarily
falling under the Investment Adviser Act of 1940 and Brokers primarily falling under the Securities
Exchange Act of 1934. While both Advisers and Brokers are regulated by the SEC,8
Brokers must also
comply with additional rules promulgated by the Financial Industry Regulatory Authority (“FINRA”)
and other self-regulatory organizations.
Written by:
Brittany Burns
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DUAL REGISTRATION: DUTIES, RISKS AND REWARDS
WHITEPAPER

Brokers and Advisers also have different disclosure requirements, permissible compensation
schemes and fiduciary duties. These three differences provide the most friction when an individual
is dually registered as an Adviser and Broker. Understanding the individual responsibilities of an
Adviser and a Broker, and how dual registration can change those responsibilities, is paramount for
Advisers and Brokers to remain in compliance with applicable law.
Duties of Advisers and Brokers
ThebiggestpointoffrictionbetweenAdvisersandBrokersisthedifferentdutiesowedbytheAdviser/
Broker to his or her clients. In terms of an Adviser, the Supreme Court has interpreted the antifraud
provision of the Investment Adviser Act as imposing a fiduciary duty on Advisers when dealing with
clients.9
This duty requires Advisers to offer neutral and disinterested advice that is solely in the best
interest of the client. The SEC has interpreted several obligations flowing from an Adviser’s fiduciary
duty, including: (1) full disclosure of material facts, conflicts of interest, and disciplinary events and
precarious financial conditions; (2) providing suitable advice10
; and (3) having a reasonable basis
for recommendations.11
The fiduciary duty is absolute and does not require a showing of scienter
on the part of the Adviser or actual injury to a client.12
Thus, an Adviser is strictly liable under the
Investment Adviser Act’s antifraud provision for any breach, intentional or non-intentional, of their
fiduciary duty to their clients. In addition to their fiduciary duties, Advisers have a duty of best
execution and a duty to make suitable recommendations.
In contrast, Brokers are generally excluded from the definition of ‘investment advisers’ and are not
held to the high fiduciary standard encompassed in that designation.13
Instead, Brokers have a duty
of fair dealing, a duty to make suitable recommendations, and a duty of best execution.14
These
duties, like the fiduciary duty, are intended to protect investors but are a much lower threshold than
the fiduciary standard imposed on Advisers. Courts have upheld these duties under the “shingle”
theory, which holds that by conducting business as a Broker (i.e. “hanging your shingle”), the Broker
implicitly represents that he will deal fairly with customers, consistent with the standards of the
profession, and imposes on him a “special duty, in view of [their] expert knowledge and proffered
advice, not to take advantage of [their] customers’ ignorance.”15
The “suitability” duty differs from the fiduciary duty imposed on Advisers because it does not require
theBrokertoactwithtotalindifferencetotheBrokers’ownpersonalinterest.Instead,Brokersareonly
required to act in accordance with industry standards. Thus, Brokers can make recommendations
to clients that will benefit the Broker, so long as the client meets suitability requirements and the
recommendation is one that is consistent with industry standards. Advisers are required to act with
complete loyalty to the customer and must avoid conflicts of interest that may benefit the adviser,
even if the benefit does not detriment the client. In contrast, Brokers may weigh different factors
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and suggest securities that directly benefit the Broker, so long as the customer is informed and the
Broker is acting in concert with industry standards.
As part of the duty to deal fairly with customers, Brokers have an obligation to only recommend
investments and investment strategies that are suitable for their customers, as well as a duty to
ensure customer-specific suitability.16
In determining whether an investment is suitable for a
customer, Brokers must have an “adequate and reasonable basis” for their recommendation.17
This requirement invokes a due diligence analysis by the Broker to obtain information about the
customer, which may include, but is not limited to: (i) age; (ii) other investments; (iii) financial
situation and needs; (iv) tax status; (v) investment objectives; (vi) investment experience; (vii)
investment time horizon; (viii) liquidity goals; and (ix) risk tolerance.18
The Broker has a duty to
request the information, however, a recommendation may still be made if not all the information is
available so long as the Broker has a reasonable basis to believe the recommendation is suitable,
based on the information available.19
In addition, in order to make a recommendation that is
adequately and reasonably based, a Broker must “understand the risks and rewards inherent in that
recommendation.”20
In essence, the suitability requirement is two-fold, Broker’s must know their
customers and know the details of the security they are recommending.
Finally, Brokers have a duty of best execution, which requires Brokers to “use reasonable diligence
to ascertain the best market for the security and buy or sell in such market so that the resultant
price to the customer is as favorable as possible under prevailing market conditions.”21
FINRA Rule
5310 defines specific factors that are used in determining whether a member used “reasonable
diligence,” which are measured without regard to the Broker’s mental state. In addition, if a Broker
has scienter or acts recklessly when selling a security, he may be found additionally liable under
Exchange Act §10b and SEC Rule 10b-5.22
The difference between the duties owed by Advisers and those owed by Brokers is where the most
friction occurs when an individual is dually registered. Both Advisers and Brokers have a duty of best
execution and a duty of suitability, but these flow from their overarching fiduciary duty and duty of
fair dealing, respectively.
The different duties stem from the historically different roles that Advisers and Brokers occupy for
investors. Advisers have historically been viewed as trusted resources who are consulted to give
advice solely with the client’s best interest in mind, free from any influence or conflict that may sway
the adviser’s recommendation. This is reflected in the compensation structure of most Advisers
and in the Court’s interpretation of the duties owed by Advisers to their clients. In contrast, Brokers
have historically been viewed as intermediaries, their purpose being to facilitate transactions and
connect investors to investments.23
Investors are aware of the commission based compensation

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that most Brokers receive and thus are unlikely to place the same level of trust that the Broker is
acting solely in their best interest. The roles that investors perceive Advisers and Brokers playing
causes a conflict when an individual is dually registered and provides both services to a client.
One way in which a dually registered individual can mitigate liability for breach of fiduciary duties
is to act in the best interest of the client at all times and refrain from any activity that conflicts with
the client’s interest. Elevating Brokers to a fiduciary standard of care has gained traction in recent
years, culminating with the Department of Labor’s fiduciary rule that will expand the definition
of investment advice to encapsulate Brokers who provide recommendations to retirement plan
participants.24
In response to the Department of Labor’s proposal, FINRA chairman and CEO Richard
Ketchum issued remarks at the 2015 FINRA Annual Conference rejecting the Department of Labor’s
proposal, while advocating for a “best interests of the customer” standard that would closely
parallel the fiduciary duties required by Advisers.25
However, even if a Broker is acting in the best interests of the customer, a dually registered individual
will still be scrutinized heavily in certain situations where a conflict of interest is unavoidable. An
example of an unavoidable conflict is a Broker selling interests in his or her own outside business
activity (“OBA”). There is an obvious conflict in that the Adviser/Broker has an interest in selling the
securities and raising capital for his OBA. The Adviser/Broker can disclose this conflict of interest,
but under the fiduciary standard of care disclosure does not waive the duty act in the best interest
of the investor. Therefore, the dually registered individual has a very high threshold to prove the
security was suitable for the investor, that the transaction will be executed under the most favorable
terms, and that the investment is in the best interest of the investor. This leaves the Adviser/Broker
open to a great deal of liability because any small discrepancy or proof that the investment was not
in the best interest of the client is cause for a breach of duty action against the Adviser.
Disclosure Requirements
Broker and Advisers have varying disclosure requirements, each based in the perceived role of the
individual position. The most important disclosure requirement for Advisers is the “brochure rule,”
which requires registered investment Advisers to provide clients with a Form ADV Part 2A (brochure)
that describes “the adviser’s business practices, conflicts of interest and background of the
investment adviser and its advisory personnel.”26
The adviser must provide the brochure to clients
in advance, and in any case no later than entering into a contract. If there are any material changes
to the brochure since the adviser’s last annual update, the Adviser must amend the brochure and
provide each client with an update within 120 days of the end of the adviser’s fiscal year.27

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In addition, Advisers are required to disclose all material information regarding compensation,
conflicts of interest between the Adviser and its clients, and any benefits the Adviser may receive
from third parties as a result of its recommendation to clients.28
These disclosure requirements
reflect the fiduciary duty implicit in the definition of an investment adviser.
On the other hand, Brokers are required to disclose conflicts of interest to their customers under
SEC Rule 240.10b-10(a)(2).29
Unlike Advisers, Brokers are not required to disclose the conflict at the
beginning of the relationship with a client. Instead, Brokers have to make the disclosure at or before
completion of a transaction, but best practices reflect early disclosure.30
In addition, the Exchange
Act Rules 15c1-5 and 15c1-6 require disclosure if a Broker has any control, affiliation, or interest in a
security it is offering or in the issuer of the security.31
FINRA also has defined rules that require disclosure by Brokers under specific circumstances. FINRA
Rule 2262 requires disclosure if a firm controls, is controlled by, or is under common control with
an issuer of securities.32
Rule 2269 requires written disclosure to customers for trades in any security
in which the firm is participating in the distribution or is otherwise financially interested.33
Another
disclosure requirement is found in Rule 5121, which prohibits participation in a public offering
where the Broker has a conflict of interest unless the Broker makes a prominent disclosure in the
prospectus.34
While Advisers and Brokers are both required to disclose conflicts of interest, the extent of these
disclosures vary. Disclosure compliance is one of the easier thresholds to pass when an Adviser
duallyregistersasaBroker,sinceAdvisersarealreadyrequiredtomakemoreexhaustivedisclosures.
A Broker who decides dually registers as an Adviser will now be required to file a Form ADV and
look more closely at whether the securities that the Broker is selling creates a conflict of interest,
and if that conflict is prohibited when the Broker is acting as an Adviser. As discussed previously,
for Brokers selling interests in their own OBA, an obvious conflict is created if that Broker is also
registered as an Adviser and recommending clients to invest in his OBA. As a Broker, disclosure of a
conflict of interest is sufficient and a client may waive objection to the conflict by proceeding with
the transaction. In comparison, an Adviser has a duty to avoid conflicts of interest and disclosure of
a conflict does not waive the Adviser’s fiduciary duties.35
If an Adviser recommends the purchase of a
security in his OBA that is not in the best interest of his client, regardless of whether the client knew
of the conflict before entering into a contract with the Adviser, the Adviser is still liable.
Like many securities laws, disclosure requirements are intended to protect investors by providing
them with as much information about the motivation behind their Adviser or Broker’s actions.
Disclosure can expose these conflicts of interest, allowing investors to determine whether they
would like to proceed with a recommended investment or seek advice from an unencumbered

Adviser or Broker. In addition to disclosure, compensation structures of an Adviser and Broker can
suggest the motivation behind the registered person’s actions.
Compensation Structures for Advisers and Brokers
Advisers are typically paid in one of three ways: (1) an hourly fee; (2) fees based on gains in the
investments they manage; or (3) an assets under management fee (“AUM fee”).36
An hourly fee is
commonly used when providing clients with “one-off” advice or financial planning sessions and it
limits the fiduciary duty to that one occasion. An Adviser is still required to act in the best interest of
their client under an hourly fee. However, upon completion of the consultation, the Adviser does not
have a duty to continue to act in the best interest of the client, such as suggesting to sell a security
or updating the client if a change in the market down the road results in a change in the advice that
was given. In addition, hourly fees are gaining popularity as a way for Advisers to earn compensation
when managing accounts with a smaller number of assets.
The second Adviser compensation structure is fees based on gains in investments the Adviser
manages, also known as a “carry.” A carry compensates Advisers based on the success of his or her
recommendations. Carries bolster the adviser’s compliance with his or her fiduciary duty because
the adviser has incentive in actually recommending the best investments for his client. Carries differ
from commissions in that a carry is paid based on gains in an investment, i.e. a carry is not paid
until the investment earns money. Commissions, on the other hand, are paid upon transaction,
regardless of whether the security grows in value or depreciates in the future.
Finally, a third way in which Advisers are compensated is through an AUM fee. An AUM fee is a fee
based on the amount of assets an adviser manages for a client. AUM fees are the most popular
Adviser payment structure37
and usually are calculated as 1% of the assets an Adviser is tasked with
managing and giving advice about. The AUM fee also coincides with the fiduciary duty required by
Advisers because it establishes and reflects more long term, trusted relationships between clients
and their Advisers. These three fee structures – hourly fees; carries; and AUM fees – allow for Advisers
to provide recommendations that best suit their clients versus recommendations that provide them
with initial monetary gains.
Comparatively, Brokers are usually compensated through transaction based compensation.
Transaction based compensation are commissions paid based on the amount of securities sold
or profit netted from the sale of a security.38
The commission received by Brokers differs from the
carry paid to Advisers because of the differing duties owed by Brokers and Advisers. While Advisers
are always under a fiduciary duty to act in the best interest of their clients, Brokers are only required
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to ensure suitability and fair dealing. Thus, a Broker is more likely to recommend suitable securities
that offer the highest commission to the Broker.
An individual who is dually registered has to consider the implications of the type of compensation
they receive. Both Advisers and Brokers have a duty to charge their clients fair and reasonable
fees.39
In a study released by FINRA in 2013, the SRO stated that taking front end compensation as
well as long term AUM fees would create “a clear conflict [of interest].”40
Thus, for dually registered
individuals a choice must be made from the outset – either accept transaction based compensation
in the form of commissions for the transaction effected or charge fee-based compensation in the
form of AUM fees or hourly/flat fees. Dual registration does not equate to dual compensation, and
Advisers/Brokers must be cognizant that their compensation structure does not result in “double
dipping,” or the Adviser/Broker receiving both front end (commission) and back end (carries/AUM)
fees.
Benefits and Risks of Dual Registration
Benefits of Dual Registration
Dual registration can provide many benefits to both Brokers and Advisers, the most obvious of which
is expanding their business and opening up new avenues of investment to their clients. In addition,
clients have access to a one-stop shop for both advice and investment opportunities. Advisers
also benefit from the protection of the broker dealer that they register with, who is charged with
supervising the adviser and thus bears more liability from clients and regulatory agencies. Advisers
also benefit from dual registration because they can focus more on selling and management of
deals while allowing the Broker to focus on the administration and compliance requirements.
Risks of Dual Registration
While an estimated 24,000 Advisers are dually registered as Brokers, some don’t understand the risks
and responsibilities of dually registering.41
As discussed, dual registration requires an awareness
that you are acting under the correct standard of care pursuant to the role you are playing with a
particular client at that time. Alternating between an advisory role and a broker role with the same
investor can cause confusion on the part of the investor and open the Adviser/Broker to scrutiny
from regulatory agencies. If a dually registered individual is providing both Adviser and Broker
services to the same client, the prudent course is to act as a fiduciary in both roles.
Another risk of dual registration is the risk of an individual not concurrently complying with the
extensive regulatory regimes that Advisers and Brokers are subject. In recent years, compliance
officers have been tasked with carefully supervising dually registered Advisers to ensure compliance

with FINRA Rule 3280.42
Advisers who wish to participate in a private securities transaction, even
one they had been involved with before dual registration, are required to disclose to their member
firm their participation in the transaction and receive permission to participate in the transaction.43
Failure to disclose their participation opens up both the member firm and the dually registered
Adviser to liability.
An Adviser/Broker who participates in a private securities transaction without giving prior notice to,
and receiving permission from, their member broker-dealer is said to be “selling away” from their
firm. Upon notice that an Adviser/Broker is selling away, a member broker-dealer may file a Form
U5 termination notice and report to FINRA that the termination is for cause.44
An Adviser/Broker
who is found guilty of selling away by FINRA faces serious consequences, including disgorgement
of any fees earned from the selling away, monetary sanctions up to $73,000.00, and suspension or a
complete bar from participating in another private securities transaction.45
In addition, a member firm can face regulatory penalties and can be held vicariously liable for
any damages incurred by an investor that is the victim of a Broker who sold away. A firm can face
regulatory penalties for failing to “establish and maintain a system to supervise the activities of each
associated person.”46
If a Broker is found liable of selling away, FINRA will usually turn their eye to the
firm to ensure that the firm has established procedures to properly supervise associated persons.47
Failure to properly supervise a Broker may result in regulatory fines and penalties. In addition, if the
firm knew or should have known of the Broker’s selling away, the firm can be vicariously liable for
damages incurred by an investor in the sold away security.
Conclusion
In conclusion, dual registration can provide additional revenue streams and offerings to current
customers of Advisers and Brokers. However, as reflected by the DOL’s final rule, regulatory entities
are taking a closer look at the duties owed by Advisers and Brokers.48
A dually registered Adviser/
Broker should ensure that it complies with the correct fiduciary standard that is required under the
services he or she is providing. Once the standard of care is determined, the Adviser/Broker should
ensure that all disclosures and compensation structures comply with the standard the relationship
falls under. The penalties for non-compliance with laws regulating Advisers and Brokers can range
from disgorgement of ill-gotten gains to a life-time ban from the securities industry, therefore
understanding the rules and regulations surrounding dual registration is imperative.
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Disclaimer: WealthForge provides this information to our clients and other friends for educational
purposes only. It should not be construed or relied upon as legal advice.

WHITEPAPERREFERENCES
1
29 CFR 2510.3-21 (April 6, 2016).
2
Id.The rule expanded the definition of what constitutes “retirement investment advice,” and thus expanded who constitutes a “retirement investment adviser.” Retirement
investment advisers owe a fiduciary duty to act in the best interest of their clients, and under the new rule can include “a broker, registered investment adviser, insurance
agent, or other type of adviser.” See Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars
Every Year, UNITED STATES DEPARTMENT OF LABOR (2016), available at http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html.
3
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 201 (1963)(“The statute, in recognition of the adviser’s fiduciary relationship to his clients, requires that his advice
be disinterested”).
4
See FINRA RULE 2111, Suitability, available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859&print=1.
5
John J. Topoleski and Gary Shorter, Department of Labor’s 2015 Proposed Fiduciary Rule: Background and Issue, Congressional Research Service (October 8, 2015)
[hereinafter “DOL PROPOSED RULE STUDY”].
6
Investment Advisers Act of 1940, § 202 (a)(11); 15 U.S.C. § 80b-2(a)(11) (2016) [hereinafter “Investment Advisers Act”].
7
Securities Exchange Act of 1934, § 3(a)(4)(A); 15 U.S.C. §78c (a)(4)(A) (2015) [hereinafter “Exchange Act”]. A “dealer” is defined as “any person engaged in the business of
buying and selling securities for his own account, through a broker or otherwise.” See Exchange Act §3(a)(5)(A).
8
Investment Advisers are regulated by the SEC if the adviser (1) manages more than $100 million in customer assets, (2) advises certain funds or business development
companies, or (3) works in a state that does not register Advisers. See 17 C.F.R. § 275.203A-1 (2011); See also Stephen Wink, Stefan Paulovic and Michael Shaw, Dually
Registered Brokers and Advisers, 46 THE REVIEW OF SECURITIES AND COMMODITIES REGULATION 15 (September 4, 2013) (“S&C Regulation Article”).
9
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (holding that under Section 206 of the Investment Advisers Act, advisers owe an affirmative fiduciary
duty of “’utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading’ his
clients.”).
10
Investment Advisers Act Release No. 1406 (March 16, 1994); see also General Information on the Regulation of Investment Advisers, U.S. SECURITIES AND EXCHANGE
COMMISSION (2011), available at https://www.sec.gov/divisions/investment/iaregulation/memoia.htm.
11
Regulation of Investment Advisers by the U.S. Securities and Exchange Commission, U.S. SECURITIES AND EXCHANGE COMMISSION (2013), available at https://www.sec.
gov/about/offices/oia/oia_investman/rplaze-042012.pdf.
12
Capital Gains, 375 U.S. 180, 195 (1963) (holding that “Congress, in empowering the courts to enjoin any practice which operates ‘as a fraud or deceit’ upon a client, did
not intend to require proof of intent to injure and actual injury to the client.”).
13
Investment Adviser Act § 202(a)(11)(C) (“’Investment adviser’…does not include (C) any broker or dealer whose performance of such services is solely incidental to the
conduct of his business as a broker or dealer and who receives no special compensation therefor.”).
14
See Exchange Act § 9(a) (prohibiting particular manipulative practices regarding securities registered on a national securities exchange); Exchange Act § 10(b) (prohibiting
the use of “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of any security); Exchange Act §§ 15(c)(1) and (2) (prohibiting
broker-dealers from effecting transactions in, or inducing the purchase or sale of, any security by means of “any manipulative, deceptive or other fraudulent device.”; See
also FINRA RULE 2111, FINRA RULE 5310.
15
Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir. 1943); see Study on Investment Advisers and Broker Dealers, SECURITIES AND EXCHANGE COMMISSION, 1 (Jan.
2011) [hereinafter 2011 SEC STUDY], available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf; see also In re Duker & Duker, Exchange Act Rel. No. 2350, 1939
WL 36426, at *3 (Dec. 19, 1939) (“Inherent in the relationship between a dealer and his customer is…that the customer will be dealt with fairly, and in accordance with the
standards of the profession.”).
16
U.S. Securities and Exchange Commission Division of Trading and Markets, Guide to Broker-Dealer Registration, U.S. SECURITIES AND EXCHANGE COMMISSION (April
2008), available at https://www.sec.gov/divisions/marketreg/bdguide.htm.
17
Hanleyv.SEC,415F.2d589,597(2dCir.1969)(abroker-dealer“cannotrecommendasecurityunlessthereisanadequateandreasonablebasisforsuchrecommendation”);
see FINRA RULE 2111 (“A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a
security or securities is suitable for the customer”).
18
FINRA, Suitability: What Investors Need to Know (last accessed on March 30, 2016), available at http://www.finra.org/investors/suitability-what-investors-need-know.
19
Id.
20
Michael Frederick Siegel, Exch. Act Rel. No. 58737 (October 6, 2008).
21
FINRA RULE 5310.
22
2011 SEC STUDY, supra note 18, at 70.
23
Id. at 8.
24
DOL PROPOSED RULE STUDY, supra note 5, at “Summary”; see also Helen Quigley, Kicking the Can Down the Road: Dodd-Frank’s Attempted Reform on Broker-Dealers, 59
N.Y.L. Sch. L. Rev. 561 (2014-2015) (outlining the SEC’s actions regarding implementing a fiduciary standard from receiving rulemaking authority under Dodd-Frank in 2010
through the SEC requesting public comment regarding a standard in 2013).
25
Richard G. Ketchum, Remarks from the 2015 FINRA Annual Conference (May 27, 2015) (last accessed on March 31, 2016), available at https://www.finra.org/newsroom/
speeches/052715-remarks-2015-finra-annual-conference (“I continue to believe today that, for both investor protection and firm cultural reasons, a best interest standard
for broker-dealers – under the securities laws – is the direction we must go”).
26
General Information on the Regulation of Investment Advisers, SECURITIES AND EXCHANGE COMMISSION (2011), available at https://www.sec.gov/divisions/investment/
iaregulation/memoia.htm; see Investment Advisers Act Rule 204-3; 17 C.F.R. 275.204-3.
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REFERENCES

27
17 C.F.R 275.204-3(b)(2).
28
General Information on the Regulation of Investment Advisers, SECURITIES AND EXCHANGE COMMISSION (2011), available at https://www.sec.gov/divisions/investment/
iaregulation/memoia.htm.
29
See 17 C.F.R. §240.10b-10(a)(2) (“provide written notification disclosing…if the broker or dealer
30
17 C.F.R. §230.10b-10(a).
31
Exchange Act § 15c1-5 (“The term manipulative, deceptive, or other fraudulent device or contrivance… include[s] any act of any broker…controlled by, controlling, or
under common control with, the issuer of any security…unless such broker…before entering into any contract with or for such customer for the purchase or sale of such
security, discloses to such customer the existence of such control”); Exchange Act § 15c1-6(“The term manipulative, deceptive, or other fraudulent device or contrivance...
include[s] any act of any broker who is acting for a customer or for both such customer and some other person…any security in the primary or secondary distribution of
which such broker…is participating or is otherwise financially interested unless such broker…at or before the completion of each such transaction gives or sends to such
customer written notification of the existence of such participation or interest”).
32
FINRA RULE 2262; see also https://www.finra.org/sites/default/files/Industry/p359971.pdf
33
FINRA RULE 2269
34
FINRA RULE 5121.
35
“Hedge Clauses” are sometimes used by Advisers to limit an Adviser’s liability, through indemnification, waiver, or limitations on liability. These clauses have risen
concerns from the SEC, who held that while the clauses are not “per se” fraudulent, they may be fraudulent depending on the circumstances. See Heitman Capital
Management, LLC, SEC No-Action Letter (February 12, 2007). Regardless, an Adviser’s disclosure of a conflict of interest does not waive liability without an additional hedge
clause, and even then liability may still be imposed.
36
2011 SEC Study at 7, supra note 15; see also Joanne Cleaver, A Guide to Financial Advisor Fee Structures, U.S. NEWS (February 18, 2014).
37
Liz Skinner, Advisers shift away from AUM fees to better serve clients, INVESTMENT NEWS (May 14, 2015) (stating that a 2014 study found that 95% of investment advisers
set fees based on AUM).
38
2011 SEC Study at 10-11, supra note 15.
39
FINRA RULE 2121; See Shareholder Service Corp., SEC Staff No-Action Letter (Feb. 3, 1989).
40
Report on Conflicts of Interest, FINRA, at 29 (October 2013), https://www.finra.org/sites/default/files/Industry/p359971.pdf; See Timothy Edward Daly, FINRA Letter of
Acceptance Waiver and Consent (April 27, 2012) (holding that taking front end commissions on transactions in a retail account and AUM fees on the same securities in a
fee-based account was in violation of FINRA Rule 2010).
41
Matthew Rieker, Dually Registered Investment Advisers Blur the Broker-Fiduciary Line (March 26, 2015) (citing data research firm Cerulli), available at http://www.wsj.com/
articles/dually-registered-investment-advisers-blur-the-broker-fiduciary-line-1427384699.
42
FINRA RULE 3280; See also Les Abromovitz, Watch Out for Outside Business Activities and Private Securities Transactions, ScottTrade Advisor Services (January 11, 2011)
(last accessed on March 31, 2016), available at http://advisoradvocate.scottrade.com/2011/01/11/watch-out-for-outside-business-activities-and-private-securities-
transactions/.
43
FINRA RULE 3280(b).
44
FINRA RULE 2010. Selling away is a violation of FINRA Rule 2010. Broker-Dealers have written supervisory procedures that define the managing broker-dealer’s required
response to a registered representative “selling away.” This allows the member broker-dealer discretion over how to punish a registered person, however, it also creates
liability for the member broker-dealer if they decide not to reprimand a violating registered representative. Thus, many member broker-dealers require an immediate filing
of a U-5 terminating for cause upon notice that an affiliated registered person is selling away.
45
FINRA, Sanction Guidelines (March 2015), available at www.finra.org/sites/default/files/Sanctions_Guidelines.pdf.
46
FINRA RULE 3110.
47
Id. When investigating whether a firm established and maintained procedures, FINRA looks to see that a member firm has provided, at a minimum, the following: (i)
written supervisory procedures; (ii) principals with authority to supervise; (iii) registration and designation of branch offices; (iv) designation of a principal at each branch
office; (v) assignment of registered persons to an appropriate supervising principal; (vi) use of reasonable efforts to determine supervisory personnel are qualified; (vii)
annual training of registered representatives.
48
2011 SEC Study at vi, supra note 15 (arguing for a uniform fiduciary standard for brokers and dealers that is no less stringent then the fiduciary standard imposed on
investment advisers).
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