Fiduciary Standards of Stockbrokers

Recently, the Securities and Exchange Commission (SEC) Chair Mary Jo White voiced support for uniform fiduciary standards among stockbrokers and investment advisors. The Dodd-Frank Act of 2010 gave the SEC the authority to impose uniform standards and it appears that the SEC is heading in that direction. This would significantly impact the obligations of brokers and advisors, while providing increased protection for investors.

A fiduciary duty is a duty to act with the highest degree of honesty and loyalty toward another person and in the best interest of that person. One way in which a fiduciary relationship can be created is through agency, in which an agent acts on behalf of a principal. In financial investment terms, an advisor may be considered the agent of the client. However, the SEC may also implement a fiduciary obligation on stockbrokers through regulation.

Currently, registered investment advisors have both suitability and fiduciary obligations, while registered representatives (stockbrokers) only have a suitability requirement. The suitability obligation means advisors and stockbrokers are required to recommend investments that coincide with the investor’s objectives, financial situation, or risk tolerance. Under suitability, there is no obligation to only recommend the best investment, so long as the advice is suitable given the investment profile of the investor.

Through adoption of uniform standards, the SEC may increase the obligations on brokers. It is possible that brokers will be forced to only recommend financial products that are in the investor’s best interests. Chair White testified before the House of Representatives Committee on Financial Services that, “broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors.” Additionally, she stated, “the financial professional giving advice…should be required to provide advice that is in the client’s best interests, without regard to the financial or other interests of the financial professional.”

The Dodd-Frank Act suggested the SEC study the need for a uniform fiduciary standard for brokers and advisors. With Chair White apparently in favor of a uniform fiduciary standard, only two other SEC Commissioners would need to support this reform for it to become a reality. Chair White indicated she would be discussing this issue with her fellow Commissioners and has already initiated the development of rulemaking recommendations for the SEC to consider.

Chair White’s remarks were made about a month after President Barack Obama voiced support for a Department of Labor (DOL) proposal that would require brokers to act in the investor’s best interest, particularly when dealing with retirement accounts. It appears increasingly clear that there will be changes coming to the financial industry, particularly with regards to stockbrokers. Both DOL and SEC action on this issue could be completed this year.

If you would like more information regarding the possible changes in the fiduciary obligations of brokers and the protections afforded to investors, contact the securities law attorneys at the Silver Law Group.