How to Improve Retail Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission the authority to deal with two issues especially important to retail investors. First, section 913 requires the SEC to conduct a six-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and specifically authorizes the SEC to establish a fiduciary duty for brokers and dealers. Second, section 921 grants the SEC the authority to prohibit the use of predispute arbitration agreements that would require investors to arbitrate future disputes arising under the federal securities laws and regulations or the rules of a self-regulatory organization.

What has been overlooked in the debate over retail investor protection is the interconnectedness of these two provisions. Debate over retail investor protection after Dodd-Frank must consider these two issues together in order to achieve the goal of better retail investor protection. I make three principal arguments:

First, I argue that broker-dealers and investment advisers should be held to standards of care and competence based on professionalism, rather than fiduciary duty.

Second, I propose, for adoption by the SEC, federal professional standards of competence and care for broker-dealers and investment advisers.

Third, I argue that SEC adoption of standards of care will not create any additional federal remedies for investors because it is unlikely that the U.S. Supreme Court will create a private damages remedy for their breach. If the SEC prohibits mandatory securities arbitration of claims based on federal securities law and SEC and SRO rules, the ability of retail investors, particularly those with small claims, to recover damages for careless and incompetent investment advice may be substantially reduced.

Keywords: Broker-Dealer, Investment Adviser, Securities Arbitration, Financial Regulatory Reform, Fiduciary Duty

JEL Classification: G24, G28, K22