As we’ve explained in the past, most lawyers in the claimants’ bar contend that brokers are subject to a fiduciary standard and owe a duty to put customers’ interests ahead of the broker’s own interest in earning commissions and fees. While a stockbroker is required by rule and regulation to only recommend investments that are suitable for his or her retail client, broker-dealers (and many courts) have disputed the existence of a broad fiduciary duty applicable to brokers.
Registered investment advisors have long been deemed fiduciaries, and investor advocates argue that brokers likewise should be subject to fiduciary standards of transparency and fairness. Supporters of a uniform set of rules applicable to both brokers and RIAs argue that retail investors are entitled to expect financial advisors to be held to a consistent standard of advice. With this debate in mind, Congress included in the Dodd-Frank reform bill a grant of authority to the SEC to impose a fiduciary duty on broker-dealers. Unfortunately, the grant of authority was not a mandate and the SEC now appears to have no intention of doing so any time soon.
Speaking at FINRA’s annual conference, SEC Commissioner Daniel Gallagher recently said that he believes the jury is still out on whether it would be in the best interest of investors to extend fiduciary responsibilities to brokers, and whether the benefits of doing so would outweigh the costs. Gallagher said he remains skeptical about the recommendations of a staff report that an SEC advisory board issued last year endorsing a uniform fiduciary standard. While SEC Chairman Mary Jo White has said that she hopes to advance that proposal this year, she also recently told members of Congress that she had directed SEC staff to develop a list of alternatives to a strict uniform fiduciary standard.
This dithering is not a positive development for investors. The financial services industry no doubt is lobbying hard to stave off a fiduciary standard that would protect customers and potentially cut into industry profits. We suspect the industry will succeed in quashing the issue until the next massive scandal comes along to stir it up again.
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.
