4. The Relationship Between an Investment Service Provider and a Retail Investor: EU and the United States Compared

See: Robin S. Doak, Black Tuesday: Prelude to the Great Depression (Compass Point Books, 2008). At 13.

In the words of Professor D’Alessandro: “riforme da cui ‘tutto ebbe inizio’” [Author’s own translation from Italian: “reforms from which it all began”] ibid. At 406.

Marc Kruithof and Walter VanGerven, “A Differentiated Approach to Client Protection: The Example of Mifid,” ed. Financial Law Institute - Universiteit Gent (2010). At 7.

Section II.2. in Annex II to MiFID I.

Article 4 (1,9) MiFID II and Article 4 (1,10) MiFID I.

Article 4.1(11) MiFID II.

Annex II, MiFID II.

Danny Busch, Busch. At 152.

Article 30(1): “Member States shall ensure that, in their relationship with eligible counterparties, investment firms act honestly, fairly and professionally and communicate in a way which is fair, clear and not misleading, taking into account the nature of the eligible counterparty and of its business.” Interestingly, in July 2017 the Italian Court of Cassation already endorsed the application of the general obligation of fair dealing to eligible counterparties and declared void a derivative contract on the grounds that the investment service provider should have acted in the best interests of the clients [Cassazione Civile, Sez. I, 31 Luglio 2017, N. 19013, 2017 (2017).].

At 152.

On “moral hazard”: Paul R. Krugman, The Return of Depression Economics (London: Penguin UK, 2008). At 165. Tom Baker, “On the Genealogy of Moral Hazard,” Texas Law Review 75, no. 2 (1996).

See Christoph Kumpan and Patrick C. Leyens, “Conflicts of Interest of Financial Intermediaries - Towards a Global Common Core in Conflicts of Interest Regulation,” European Company and Financial Law Review 4, no. 1 (2008).

Conflicts of interest are particularly insidious when an investment firm provides a combination of the execution of orders on behalf of clients service and dealing on own account, that is, when in order to execute a client’s order the firm is the direct counterparty of its own client (by either creating a financial instrument or using an instrument in its own inventory). In such a business model, the internal advisory service provided by the Compliance Function is as delicate as necessary.

Article 23.1, MiFID II.

In the words of Professor Moloney: “Remuneration structures have very considerable potential to misalign incentives in the distribution process. The well-documented detriment which can follow includes biased advice, failure to provide debt reduction advice, poor product selection, inappropriate advice to switch products, and ultimately mis-selling.” Niamh Moloney, “Regulating the Retail Markets,” in The Oxford Handbook of Financial Regulation, ed. Niamh Moloney, Eilís Ferran, and Jennifer Payne (Oxford: Oxford University Press, 2015). At 757. Also the ESAs already in 2013 highlighted how, “[o]n the topic of sales incentives, it was felt that in order to avoid mis-selling of financial products, several changes in sales culture are urgently required.” Joint Committee of the European Supervisory Authorities—ESAs, “Joint Esas Consumer Protection Day,” https://​eiopa.​europa.​eu/​Pages/​Events/​Event-2.​aspx, Joint ESAs Consumer Protection Day.

Article 9.3(c), MiFID II.

Article 24.10, MiFID II. Professor Enriques carries out the perfect example of “an investment bank […] assisting a company in an IPO; and no matter how independent the people in the brokerage arm can be ‘on paper’, they may be tempted to stuff their clients’ portfolios with those shares, if they think that this will be appreciated by the firm’s top management.” Luca Enriques, “Conflicts of Interest in Investment Services: The Price and Uncertain Impact of Mifid’s Regulatory Framework,” in Investor Protection in Europe, ed. Guido Ferrarini and Eddy Wymeersch (New York: Oxford University Press, 2006). At 332. This example heralded the reasoning under the MiFID II upgrade of the independence level of the Compliance Function: from the top management to the firm’s management body (see Chap. 7).

Article 24.10, MiFID II.

European Securities and Markets Authority—ESMA, “Remuneration Policies and Practices (Mifid) - Esma/2013/606,” https://​www.​esma.​europa.​eu/​sites/​default/​files/​library/​2015/​11/​2013-606_​en.​pdf.

Article 23.2–3.

Ibid.

Ibid.

Article 11.5(c), Commission Delegated Directive 2017/593/Eu.

In terms of type of instrument and issuers or product providers.

Article 24.10, MiFID II.

Article 12.3 Commission Delegated Directive 2017/593/Eu provides a list of criteria to qualify benefits as acceptable minor non-monetary benefits.

Ibid. At 55.

Article 54.12 Commission Delegated Regulation 2017/565/Eu.

“Where an investment firm provides a service that involves periodic suitability assessments and reports, the subsequent reports after the initial service is established may only cover changes in the services or instruments involved and/or the circumstances of the client and may not need to repeat all the details of the first report.” Article 54.12 Commission Delegated Regulation 2017/565/Eu.

Commission Delegated Regulation 2017/565/Eu.

Such as “information regarding the financial situation of the client or potential client shall include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.” Article 54.4 Commission Delegated Regulation 2017/565/Eu.

Article 25.3.

Article 25.3.

Casey and Lannoo. At 55.

ESMA specifies that such market factors are: (1) low returns from the traditional forms of investments or ordinary deposits, and (2) market volatility. European Securities and Markets Authority—ESMA, “Mifid Practices for Firms Selling Complex Products - Esma/2014/146” (Paris, FR, 2014). At 1.

Such as the right to convert the instrument into a different kind of investment (Article 57d).

“The objective […] appears to be to build an informed and empowered investor base, using relevant and comprehensible information.” Ibid. At 386.

Article 44(2f), ibid.

Ibid.

Regarding the disclosure of information in “good time before the provision of investment services” (Article 46), the Compliance Function should find operative solutions in case of reception of orders via online means or over the phone. The first case looks easier and may be resolved by providing the client with an information sheet before s/he can actually enter the order. The second case is more delicate and a more conservative approach might be an automatic message reading the information sheet for the customer. However, this could very much delay the operation and the customer should be free to choose the information sheet via email in order to quickly proceed with the order.

Article 47(1f).

Article 4(42), MiFID II.

European Securities and Markets Authority—ESMA, “Guidelines on Cross-Selling Practices” (2016).

Article 50 Commission Delegated Regulation 2017/565/Eu.

Article 50(1).

Article 50(2).

Article 50(10).

Article 50 (5), ibid.

On the industry evolution toward an order-by-order Best Execution: ibid.

Busch. At 159.

Article 64 on the Best Execution criteria; Article 65 on the duty of investment firms carrying out portfolio management and reception and transmission of orders to act in the best interests of the client; Article 66 on the Execution Policy; Article 67 on general principles (for client order handling); Article 68 on aggregation and allocation of orders; Article 69 on aggregation and allocation of transactions for own account [importantly, a firm must pay particular attention, by complying with specified conditions, in case of aggregated transactions for own account, since it may generate conflicts of interests between the firm and its clients]; Article 70 on prompt fair and expeditious execution of client orders and publication of unexecuted client limit orders for shares traded on a trading venue.

Committee of European Securities Regulators—CESR, “Best Execution under Mifid. Public Consultation - Cesr/07-050b” (2007). At 8.

Ibid.

Financial Services Authority—FSA, “Fg12/09, Retail Product Develop-ment and Governance – Structured Product Review” (2012). At 3.

Ibid. At 4.

Ibid. At 5.

Ibid.

Regulation 1286/2014/Eu.

Article 9.

Article 9.

The Delegated Directive provides for a list of non-exhaustive list negative conditions to be taken into account: “(a) the market environment deteriorated; (b) the manufacturer or a third party involved in manufacturing and or functioning of the financial instrument experiences financial difficulties or other counterparty risk materializes; (c) the financial instrument fails to become commercially viable; or (d) demand for the financial instrument is much higher than anticipated, putting a strain on the firm’s resources and/or on the market of the underlying instrument.” Article 9.10, Commission Delegated Directive 2017/593/Eu.

Article 9 of the ibid. requires that the firm assess whether a financial product creates a situation where clients may be adversely affected if they take “(a) an exposure opposite to the one previously held by the firm itself; or (b) an exposure opposite to the one that the firm wants to hold after the sale of the product”.

Article 10.2.

Article 10.2.

In early August 2017, the European Fund and Asset Management Association (EFAMA) endorsed and published the European MiFID Template (EMT). The EMT is a template for information exchange that can be used by both product manufacturers and distributors, and it provides for a minimum set of data, such as a product’s target market and costs and charges disclosure. European Fund and Asset Management Association—EFAMA, “European Mifid Template (Emt)” (2017).

Article 10.2.

Article 10.2.

Article 10.1.

Article 10.2.

Article 10.10.

Ibid. At 630.

Section 2(a)(1) states that: “The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” The Truth in Securities Act, ch. 38, title I, Sec. 1, 48 Stat. 74. [1933b].

Securities and Exchange Commission V. W. J. Howey Co., 328 U.S. 293 (1946). In this case the Court held that when a contract “involves an investment of money in a common enterprise with profits to come solely from the efforts of others”, then the contract at issue is to be considered as an “investment contract”, capable of triggering the investor protection rules conveyed by the Securities Act of 1933.

Department of the Treasury, “Blueprint for a Modernized Financial Regulatory Structure” (Washington, DC, 2008). At 56.

Ibid. At 56.

“Unlike a broker who acts as agent, a dealer acts as principal.” Securities and Exchange Commission—SEC, “Broker Dealer Registration,” https://​www.​sec.​gov/​fast-answers/​answersbdregisht​m.​html.

Dealing self-issued instruments directly with customers.

Matthew P. Allen, “A Lesson from History, Roosevelt to Obama — the Evolution of Broker-Dealer Regulation: From Self-Regulation, Arbitration, and Suitability to Federal Regulation, Litigation, and Fiduciary Duty,” Entrepreneurial Business Law Journal 5, no. 1 (2009). At 20. Steven A. Ramirez, “The Professional Obligations of Securities Brokers under Federal Law: An Antidote for Bubbles?,” University of Cincinnati Law Review 70, no. 2 (2002). At 534.

Securities and Exchange Commission—SEC, “Study on Investment Advisers and Broker-Dealers” (Washington, DC, 2011). At iii.

See the SEC official website: Securities and Exchange Commission—SEC, “Self-Regulatory Organization Rulemaking,” https://​www.​sec.​gov/​rules/​sro.​shtml. See also: Financial Industry Regulatory Authority—FINRA, “Sec Approval of Finra Funding Portal Rules and Related Forms. January 2016,” https://​www.​finra.​org/​sites/​default/​files/​Regulatory-Notice-16-06.​pdf. At 6; As specified in 2015 by the SEC: “While FINRA is the only registered national securities association at present, we recognize that a new national securities association or associations could register with us in the future.” Securities and Exchange Commission—SEC, “Exchange Act Release No 76324 (October 20, 2015)” (2015). At 157.

“Study on Investment Advisers and Broker-Dealers.” At 47.

Securities and Exchange Commission—SEC, “Release No. 34-56145” (Washington, DC, 2007).

The NASD was established in 1939 and formally registered with the SEC under the auspices of the Maloney Act on 7 August 1939. The NASD Uniform Practice Code was adopted in 1941 and it is now the FINRA Uniform Practice Code (UPC) [see: Financial Industry Regulatory Authority—FINRA, “Finra Website - Uniform Practice Code (Upc),” http://​www.​finra.​org/​Industry/​Compliance/​MarketTransparen​cy/​UPC/​.]

“About Finra,” http://​www.​finra.​org/​aboutfinra/​.

Ibid.

“What We Do,” http://​www.​finra.​org/​about/​what-we-do.

“Arbitration and Mediation,” http://​www.​finra.​org/​arbitration-and-mediation. All contracts between investors and FINRA-registered broker-dealers provide a clause which waives both of the parties’ right to trial in a court. This system was also backed by the US SC in 1987 in the Shearson/American Express v. McMahon case. The important Study carried out by the SEC staff does not make any recommendation as regards the arbitration system. See: SEC, “Study on Investment Advisers and Broker-Dealers.”

Securities and Exchange Commission—SEC, “Certain Broker-Dealers Deemed Not to Be Investment Advisers - Release Nos. 34-51523; Ia-2376; File No. S7-25-99” (2005). At 22.

SEC, “Study on Investment Advisers and Broker-Dealers.” At 15–16. If the investment advisory services are performed by a separately identifiable department or division of a bank, then that department or division, but not the entire bank, is considered as an “investment adviser” and must register. Ibid. At 89. As it was difficult to figure out whether a recommendation was purely incidental or not, the SEC adopted the “Certain Broker-Dealers Deemed Not to Be Investment Advisers” Rule [“Certain Broker-Dealers Deemed Not to Be Investment Advisers - Release Nos. 34-51523; Ia-2376; File No. S7-25-99.”].

Sec. V. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191 (1963). On this: Charles G. Nickson, “The Regulation of Investment Advice: Subscription Advisers and Fiduciary Duties,” Michigan Law Review 63, no. 7 (1965).

SEC, “Study on Investment Advisers and Broker-Dealers.”

It is worth mentioning the 1970 Securities Investor Protection Act, which established the Securities Investor Protection Corporation (SIPC) and was promulgated in the aftermath of the so-called “back office crisis” [see: Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance, 3rd Ed. (New York: Aspen Publishers, 2003).] The SIPC “oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble, and customer assets are missing”. Securities Investor Protection Corporation—SIPC, “Sipc Mission,” https://​www.​sipc.​org/​about-sipc/​sipc-mission.

Ralph Nader, “Opening the Door to New Taxpayer Bailouts,” http://​nader.​org/​1998/​02/​01/​opening-the-door-to-new-taxpayer-bailouts/​.

“[T]he Act allows existing bank holding companies to acquire full-service securities firms and insurance companies, and it allows securities firms and insurance companies to acquire a bank (and thereby become a bank holding company).” Board of Governors of the Federal Reserve System - U.S. Department of the Treasury, “Report to the Congress on Financial Holding Companies under the Gramm–Leach–Bliley Act” (Washington, DC, 2003). At 1.

Federal Reserve Bank of San Francisco, “Banking Information: Overview of the Gramm-Leach-Bliley Act” (San Francisco, CA, 2000). As mentioned in: Securities and Exchange Commission—SEC, “Sec’s Oversight of Bear Stearns and Related Entities: The Consolidated Supervised Entity Program” (2008). At 47.

Christopher Cox, “Chairman Cox Announces End of Consolidated Supervised Entities Program,” http://​www.​sec.​gov/​news/​press/​2008/​2008-230.​htm.

Treccani—Dizionario di Economia e Finanza, “Sarbanes-Oxley Act” (2012).

Ibid.

Jumpstart Our Business Startups Act. For a critical appraisal of the outcomes of this piece of legislation: Donald C. Langevoort and Robert B. Thompson, “‘Publicness’ in Contemporary Securities Regulation after the Jobs Act,” Georgetown Law Journal 101 (2013).

SEC, “Study on Investment Advisers and Broker-Dealers.” At i–ii.

Tuch. At 549–550.

In the words of Professor Avgouleas: “In an attempt to clean up US markets from abuse in the post-1929 crash era, the Roosevelt administration created widespread disclosure regimes for securities issuers and traders by means of the so-called New Deal Statutes: mainly the Securities Act 1933 and the Securities Exchange Act 1934.” Emilios Avgouleas, “What Future for Disclosure as a Regulatory Technique? Lessons from Behavioural Decision Theory and the Global Financial Crisis,” in The Future of Financial Regulation, ed. Iain G MacNeil and Justin O’Brien (Oxford: Hart Publishing, 2010). At 206. In her seminal article Professor Romano makes the case for a different approach on US securities regulations—labeled “competitive federalism”—also reforming mandatory disclosure through an opt-out option for legal systems with a lesser level of investor protection (that rational investors will likely reject by not buying securities issued thereunder): Roberta Romano, “Empowering Investors: A Market Approach to Securities Regulation,” The Yale Law Journal 107, no. 5 (1998). Apart from investor protection, information disclosure is crucial for insider trading, as was held by the United States Court of Appeals Second Circuit in the seminal case Sec V. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968).

Rule 10b-10.

Rule 10b-10.

“Failure to Disclose Material Facts - Securities Act Rel. No. 8333/Securities Exchange Act Rel. No. 48758” (2003). At 5.

Professor Laby points out that whereas “federal fiduciary standards” apply to Investment Advisers [at 717], “brokers’ fiduciary obligations arises because the duties emanate from both federal and state law” [at 712]. Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.”

SEC, “Study on Investment Advisers and Broker-Dealers.” At 22.

Haas and Howard. At 111–117, 172–173.

Advisers Act Rule 206(4)-4.

Advisers Act Rule 206(4)-4.

D. Bruce Johnsen, “The Sec’s 2006 Soft Dollar Guidance: Law and Economics”, ed. George Mason Law & Economics Research Paper No. 08-25 (2008).

Haas and Howard. At 236.

Securities and Exchange Commission—SEC, “Disclosure by Investment Advisers Regarding Soft Dollar Practices - Release No. 34-35375; Ia-1469; S7-5-95” (1995).

“A person exercises “investment discretion” with respect to an account if, directly or indirectly, such person (a) is authorized to determine what securities or other property shall be purchased or sold by or for the account, (b) makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions, or (c) otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the Commission, by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this title and the rules and regulations thereunder.” Section 3(a)(35) of the Securities Exchange Act of 1934.

Securities and Exchange Commission—SEC, “Inspection Report on the Soft Dollar Practices of Broker-Dealers, Investment Advisers and Mutual Funds,” ed. SEC Office of Compliance Inspections and Examinations (1998).

The term “good faith” differs between and within civil and common-law legal systems. It is suffice here to mention that in Continental Europe good faith has different meanings according to the national legal traditions (in Italy, for example, it is possible to divide good faith into buona fede soggettiva—namely when one of the contractual parties does not know s/he harms the other party’s rights; and buona fede oggettiva—namely the fact that contractual parties must behave loyally with one another). Differently, in the US legal tradition the term “good faith”—imported from Mainland Europe—changes its boundaries depending on whether it is applied to the performance of a contract or to the enforcement of a contract. See: Allan Farnsworth, “The Concept of Good Faith in American Law,” in Good Faith and Fault in Contract Law, ed. Jack Beatson and Daniel Friedmann (Clarendon Press, 1997).

Haas and Howard. At 219.

“Study on Investment Advisers and Broker-Dealers.” At 70.

“17 Cfr Parts 200, 201, et al. - Regulation Nms; Final Rule” (2005). At 44.

“Interpretive Release Concerning the Scope of Section 28(E) of the Securities Exchange Act of 1934 and Related Matters - Exchange Act Release No. 23170 (April 23, 1986)” (1986). At 15.

“17 Cfr Parts 200, 201, et al. - Regulation Nms; Final Rule.” At 44.

“Study on Investment Advisers and Broker-Dealers.” At 69.

SEC, “Interpretive Release Concerning the Scope of Section 28(E) of the Securities Exchange Act of 1934 and Related Matters - Exchange Act Release No. 23170 (April 23, 1986).” At 15.

Tuch. At 548.

In the words of Professor Laby: “Brokers and advisers, however, are subject to different laws and regulations that bear greatly on their duties and responsibilities to clients. Brokerage firms, which historically charge commissions, are regulated under the Securities Exchange Act of 1934 and rules imposed by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization (SRO) for broker-dealers. Advisory firms, which typically charge asset-based fees, are regulated under the Investment Advisers Act of 1940.” Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 701–702.

Allen. At 21.

Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 731.

“Although the differences may be exaggerated, the fiduciary obligation imposed by the Advisers Act appears broader than the duties imposed on brokers through application of the Exchange Act’s antifraud rules and FINRA requirements.” Ibid. At 727.

As rightly pointed out in the Rand Report: “Unlike the case of investment advisers […], broker-dealers are not categorically bound—by statute, regulation, or precedent—to a per se rule imposing fiduciary obligations toward clients. Instead, the existence of fiduciary obligations within a broker-client relationship has historically been significantly more contingent, turning ultimately on the factual nature of the relationship (usually as interpreted by courts and arbitrators).” Angela Hung et al., “Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,” ed. RAND Institute for Civil Justice (2008). At 10.

Roberta S. Karmel, “Is the Shingle Theory Dead,” Washington and Lee Law Review 52, no. 4 (1995). At 1273. Also Lee-Hazen: “When a broker has discretion with respect to executing transactions, the broker is a fiduciary. Similarly, when a broker recommends securities or transactions, heightened duties apply.” Thomas Lee-Hazen, “Are Existing Stock Broker Standards Sufficient? Principles, Rules and Fiduciary Duties,” Columbia Business Law Review 2010, no. 3 (2010). At 737.

Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 712–714.

Ibid. At 705.

Messer V. E.F. Hutton & Co., 833 F.2d 909 (11th Cir. 1987), mentioned by Lee-Hazen, Broker-Dealer Regulation in a Nutshell. At 157.

Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 713–714.

Tuch. At 553.

Madison. At 279.

Ibid. At 279. Similarly, professor Laby explains that “[t]he differences between brokers and advisers are palpable. When a broker-dealer recommends a security, for example, the firm, acting as a dealer, is permitted to sell the security to a customer from the firm’s own account—much like an automobile dealer sells its inventory off the lot. By contrast, to guard against conflicts of interest, an investment adviser is severely restricted from selling its own inventory to an advisory client”. Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 702.

Karmel. At 1275.

Ibid. At 1275.

Ibid. At 1275.

Ibid. At 159.

Ibid. At 160.

Ibid. At 160.

Ibid. At 161.

Alton Box Board Co. V. Goldman Sachs & Co., 560 F.2d 916, 922 (8th Cir. 1977). Also mentioned by Broker-Dealer Regulation in a Nutshell. At 161.

Financial Industry Regulatory Authority—FINRA, “2010. Standards of Commercial Honor and Principles of Trade” (2008).

SEC, “Study on Investment Advisers and Broker-Dealers.” At 59.

Financial Industry Regulatory Authority—FINRA, “Finra Rule 2111 (Suitability) Faq” (2008).

“2310. Recommendations to Customers (Suitability)” (1996).

“Im-2310-3. Suitability Obligations to Institutional Customers” (1996).

Securities and Exchange Commission—SEC, “F.J. Kaufman and Co., Exchange Act Release No. 27535, 50 Sec164 - December 13, 1989” (Washington, DC, 1989). As mentioned by “Exchange Act Release No. 34-37835, October 17, 1996” (Washington, DC, 1996).

“Study on Investment Advisers and Broker-Dealers.” At 50.

Ibid. At 161.

Ibid. At 161.

Financial Industry Regulatory Authority—FINRA, “2110. Recom-mendations - 2111. Suitability” (2002).

Ibid.

Tuch. At 541.

Haas and Howard. At 219.

Ibid. At 219.

Ibid. At 219.

Ibid. At 219.

Ibid. At 220–223.

Securities and Exchange Commission—SEC, “Final Rule: Proxy Voting by Investment Advisers - Release No. Ia-2106; File No. S7-38-02” (2003).

Haas and Howard. At 222.

Securities and Exchange Commission—SEC, “Concept Release on the U.S. Proxy System - Release Nos. 34-62495; Ia-3052; Ic-29340; File No. S7-14-10” (2010). At 119.

“Study on Investment Advisers and Broker-Dealers.” At 22.

Haas and Howard specify that information is material when “there is a substantial likelihood that a reasonable client would attach importance to it”. Haas and Howard. At 221.

SEC, “Study on Investment Advisers and Broker-Dealers.” At 23.

Item 8 of Form ADV Part 2A of Uniform Application for Investment Adviser Registration [“Form Adv” (2013).]: “Methods of Analysis, Investment Strategies and Risk of Loss:

“Study on Investment Advisers and Broker-Dealers.” At 28.

Tuch. At 547.

SEC, “Study on Investment Advisers and Broker-Dealers.” At 106.

Ibid. At 106.

Ibid. At 106.

Ibid. At 104.

Ibid. At 102.

Ibid. At i. In the words of Professor Laby: “The […] SEC […] has recognized for over ten years that the two groups are erasing the outward differences between them, and retail customers today see little difference between a broker and an adviser.” Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 702.

SEC, “Study on Investment Advisers and Broker-Dealers.” At viii.

Ibid. At 21.

Ibid. At 21.

Ibid. At 22.

Allen. At 30.

SEC, “Study on Investment Advisers and Broker-Dealers.” At 101.

Hung et al. At 33.

SEC, “Study on Investment Advisers and Broker-Dealers.”

SEC, “Study on Investment Advisers and Broker-Dealers.”

“Duties of Brokers, Dealers, and Investment Advisers (Release No. 34-69013; Ia-3558; File No. 4-606)” (Washington, DC, 2013).

Ibid.

Employee Benefits Security Administration—Department of Labor, “Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice,” https://​www.​federalregister.​gov/​documents/​2016/​04/​08/​2016-07924/​definition-of-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice.

A new consultation “Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers” was issued in order to gather information and data and, on these grounds, assess the range of potential regulatory actions. As of the time of writing, comments are still being received and collected.

Securities and Exchange Commission—SEC, “Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers - Submitted Comments,” https://​www.​sec.​gov/​comments/​ia-bd-conduct-standards/​iabdconductstand​ards.​htm.

Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 704. Professor Lee-Hazen, however, points out that “there are many examples of particular broker-dealer fiduciary obligations in the existing law. In fact, any time a securities broker acts as something more than a mere order taker, heightened obligations attach. There is no doubt that expressly stating that broker-dealers are fiduciaries will provide further emphasis on their obligations. However, even in the absence of a legislative or regulatory declaration to that effect, heightened standards for broker-dealers are already well established.” Lee-Hazen, “Are Existing Stock Broker Standards Sufficient? Principles, Rules and Fiduciary Duties.” At 761–762.

On this wavelength, Professor Laby argues that “[a] fiduciary duty should be imposed on a broker providing advice regardless of the method of compensation employed”. Laby, “Fiduciary Obligations of Broker-Dealers and Investment Advisers.” At 740.

“The US approach involves multiple layers of rules, sources of law, and regulators. The product is a complex and often esoteric amalgam of laws” Tuch. At 546.

On mandatory disclosure and investor protection, the seminal article of Professors Easterbrook and Fischel gives a critical appraisal on the US federal disclosure laws: Easterbrook and Fischel.

In the words of Professors Enriques and Gilotta: “ ‘market egalitarianism’, has received strong support in the past and has profoundly influenced the evolution of securities regulation on both sides of the Atlantic (for example, it gave rise to the ban on insider trading in the US and has long shaped much of the SEC policy as regards MD)” [MD: mandatory disclosure]. Enriques and Gilotta. At 515.

Fausti. At 187–189.

In the words of Professor Laby: “Over the past twenty-five years, changes in the financial services industry have blurred the line between brokers and advisers, defying the logic of the bifurcated regulatory scheme”. Laby, “Reforming the Regulation of Broker-Dealers and Investment Advisers.” At 398.

SEC, “Study on Investment Advisers and Broker-Dealers.” At 13.

Ibid. At 13.

Ibid. At 112.

On 21 January 2011, commissioners Kathleen L. Casey and Troy A. Paredes released a joint statement regarding the Study stating that the Study lacks “adequate articulation or substantiation of the problems that would purportedly be addressed via” new SEC regulation; it does not “adequately recognize the risk that its recommendations could adversely impact investors”; it “does not identify whether retail investors are systematically being harmed or disadvantaged under one regulatory regime as compared to the other and, therefore, the Study lacks a basis to reasonably conclude that a uniform standard or harmonization would enhance investor protection”. “Statement by Sec Commissioners Kathleen L. Casey and Troy A. Paredes: Statement Regarding Study on Investment Advisers and Broker-Dealers” (Washington, DC, 2011). The Securities Industry and Financial Markets Association (SIFMA), a leading financial business association, also criticized the Study by stating that simply imposing the Investment Advisers Act of 1940 (Advisers Act) fiduciary standard on the broker-dealer business model is “ill-advised because the Advisers Act was not designed to regulate brokerage activity”. SIFMA suggests the “implementation of a new harmonized fiduciary standard holds the most promise for overall better protection for retail customers, while preserving their access to, and choice among, financial products and services”. Securities Industry and Financial Markets Association—SIFMA, “Sifma Submits Comments to the Sec on the Sec Study to Comply with Section 913 of Dodd-Frank Act” (2011).

SEC, “Study on Investment Advisers and Broker-Dealers.” At 117.

Ibid. At 117.

With a focus on brokers/dealers, also highlighted by Bošković, Cerruti, and Noël.

Tuch. At 558.

Ibid. At 4.

Ibid.

On the link between MiFID conduct-of-business rules and customers’ confidence: ibid. At 2.

On the issue of the conduct-of-business rules as supervision standards in MiFID, see Olha O. Cherednychenko, “The Regulation of Retail Investment Services in the Eu: Towards the Improvement of Investor Rights?,” Journal of Consumer Policy 33, no. 4 (2010).

In the words of Della Negra: “The civil or horizontal effect of the financial regulatory provisions entails that the investor can invoke EU regulatory law in the absence of a national remedy or that he can claim for a ‘conform’ interpretation of national contract law.” DellaNegra.

Ibid. At 33.

As it is evident from the parallels drawn in the Lamfalussy Committee’s Final Report. The Committee of Wise Men—Lamfalussy Committee, “Final Report of the Committee of Wise Men on the Regulation of European Securities Markets” (2001).

Ibid. At 6.

I am referring to “the idea of fairness of market access [… that] may be found in the Anglo-American legal system”. Micklitz, “The Visible Hand of European Regulatory Private Law—the Transformation of European Private Law from Autonomy to Functionalism in Competition and Regulation.” At 13.

As Professor Cherednychenko states: “It has been widely noted that the acquis communautaire in the field of contract law aims to create the internal market and is therefore regulatory in nature.” “Financial Consumer Protection in the Eu: Towards a Self-Sufficient European Contract Law for Consumer Financial Services?.” At 478.