“Irrespective of Whether a Firm Must Meet A Suitability Or Fiduciary Standard”
We always have contended in arbitrations – usually successfully – that under the common law of most states, stockbrokers are fiduciaries. Under a fiduciary standard, the broker is required to make recommendations guided solely by the best interests of the customer. But stockbrokers deny they have any such obligation. They always argue that they are not fiduciaries and are free to make recommendations primarily guided by their own self-interests. They consider themselves bound by only one standard, i.e., the suitability standard. Under this standard, which is embedded in self-regulatory rules, brokers need only determine whether an investment recommendation is reasonably suitable for a customer in light of facts concerning that customer’s ability and willingness to accept risk.
Ever since the Dodd-Frank Act was passed in 2010, the SEC has kicked around the idea of formally adopting a uniform fiduciary standard that would apply both to broker-dealers and investment advisors. But the SEC seems to be in no hurry to act and its fair to say that a formally adopted uniform standard is far from certain.
Nevertheless, optimistic investor advocates might at least see the regulatory glass as half full. Why? FINRA – the Financial Industry Regulatory Authority — has stepped up to the plate this week. In its annual regulatory and examinations priority letter, FINRA urges brokers to embrace a culture that orients business practices with customer interests, using language similar to the “best interest” fiduciary standard that applies to registered investment advisors.
A central failing FINRA has observed is firms not putting customers’ interests first. The harm caused by this may be compounded when it involves vulnerable investors (e.g., senior investors) or a major liquidity or wealth event in an investor’s life (e.g., an inheritance or Individual Retirement Account rollover.) Poor advice and investments in these situations can have especially devastating and lasting consequences for the investor. Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers — and reduce their regulatory risk –by putting customers’ interests first. This requires the firm to align its interests with those of its customers.
Thus, FINRA is challenging brokerage firms to follow business practices that are focused on the interests of their customers, cautioning that a failure to do so undermines the integrity of the market and invites regulatory scrutiny. It remains to be seen whether arbitration panels will consider this language when evaluating the claims of investors who allege abusive sales practices on the part of FINRA members. But if arbitrators don’t consider it, it won’t be because we fail to bring it to their attention.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.