Proposed Fiduciary Duty Rule Poised to Pass, Leaves Brokers Seething

New Department of Labor rule looks to protect investors from over-zealous brokers

In an effort to protect investors from conflicted investment advice, the Department of Labor is seeking to instate a new fiduciary duty rule that has left many independent brokers-dealers chafing in their suits.

What is a fiduciary duty?

Fiduciary duty is a legal duty that requires an individual (called a fiduciary) to act solely in the interest of another party (called a principal). Fiduciaries cannot profit from any relationship with a principal unless they have the principal’s express informed consent. This duty also requires fiduciaries to avoid conflicts of interest between themselves and their principals as well as their other clients. According to Cornell University Law School, a fiduciary duty “is the strictest duty of care recognized by the US legal system.”

The Department of Labor’s proposed fiduciary duty rule is designed to eliminate the temptation faced by investment advisers to sell products with the highest commissions rather than those that serve the customer’s best interests as they save for retirement. This new rule would block brokers from selling any investment into a retirement account in return for a commission, according to Reuters.com. The broker’s compensation would instead be restricted to an hourly fee or a flat percentage of the value of a retirement account.

An exception to the rule, however, would allow commissions for easily valued investments (including exchange-traded stocks and bonds) when the broker signs a contract giving clients the right to bring class-action lawsuits if the clients’ best interests are not met.

One reason independent broker-dealers are up in arms, however, is the fact that nontraded products drive a large part of their income and their firms’ revenues. And nontraded products (as well as their commissions) will be subject to restrictions, which can jeopardize their ability to remain in business.

What constitutes a nontraded product?

According to the Reuters.com article, independent brokers “are the primary sellers of nontraded real estate investment trusts (REITs) that invest in real estate and mortgage securities, of nontraded business development companies that make loans to small and midsized companies and of oil-and-gas partnerships.” What attracts investors to nontraded securities is the relatively high income they tend to offer, however, broker commissions are higher than traded securities and the products are hard to liquidate.

Ultimately, the rule seeks to protect investors, as any financial adviser—whether using the title broker, registered investment adviser or insurance agent—will be required to provide impartial advice in the client’s best interest, and will not be allowed to accept any payments that create conflict of interest unless they qualify for an exemption.

After four days of hearings in August, the Department of Labor is expected to reissue the ruling in September for a brief comment period, and it is anticipated to go into effect the second half of 2016.

Our growing retirement community is at an increased risk for elder financial fraud and breach of fiduciary claims are on the rise against financial advisors who are handling funds for seniors, who often rely on their investment accounts for income, and other investors.

If you have been the victim of a breach of fiduciary duty and experienced financial loss after investing in a nontraded product that was not in your best interest, contact Silver Law Group today. Our experienced securities arbitration attorneys will review your case at no cost to you.