Fiduciary Obligations of Broker-Dealers and Investment Advisers

Abstract:     
The duties imposed on broker-dealers and investment advisers have been fiercely debated in Congress, at the U.S. Treasury Department, and at the U.S. Securities and Exchange Commission. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to evaluate the standards of care for brokers and advisers, and it provided the SEC with authority to adopt new rules to address regulatory gaps. Before making final decisions, and to determine whether change is warranted, one must ascertain the differences between the duties owed by brokers and advisers. This question has vexed courts and commentators for decades. The Article first explains why this question is so formidable and provides five reasons for the difficulty. It then reviews the fiduciary duties imposed on brokers and advisers in their historical context and provides concrete examples where the duties can be differentiated. The article then explains why a fiduciary obligation should be imposed, albeit cautiously, on brokers that provide advice. The explanation turns on the changed role brokers play in modern securities markets where advice is the coin of the realm and trade execution has receded in importance. The article was prepared for the Morgan, Lewis & Bockius Symposium on Securities Regulation at Villanova School of Law in 2009 and serves as a companion to a 2010 article published in The Business Lawyer, arguing that the broker-dealer exclusion in the Investment Advisers Act has outlived its usefulness.

Number of Pages in PDF File: 42

Keywords: broker-dealers, investment advisers, fiduciary duties, Dodd-Frank, Securities and Exchange Commission, financial regulatory reform

JEL Classification: K22, K23

Accepted Paper Series