Broker-Dealer: A Fiduciary by Any Other Name?
63 Pages Posted: 14 Nov 2014 Last revised: 6 Jan 2015
Date Written: November 12, 2014
Broker-dealers, unlike investment advisers, are not regulated as fiduciaries when providing investment advice, even though broker-dealers are holding themselves out as financial advisors and offering virtually identical services to investors. The lack of consistent regulation of financial service providers arises from the structure in which advice historically has been delivered. Financial services regulation since the Great Depression has developed along roughly dual tracks: laws governing the sale of financial products, which may or may not require that the products be suitable for the customer, and laws governing investment advice, which impose a fiduciary requirement on the adviser to act solely in the best interests of the client.
Even with the inconsistent regulatory and statutory framework, under common law, brokers have historically been held to a fiduciary standard of care when providing personalized investment advice to retail customers or when holding themselves out to the public as trusted financial advisors who provide unbiased investment advice. In situations where brokers were determined not to be fiduciaries, they were solely providing transactional assistance to clients (acting as salespeople).
This Article begins by examining the historical origins of broker-dealers as fiduciaries; uses statutory construction to give effect to the clear intent underlying Congress’ enactment of the Investment Advisers Act of 1940 (Advisers Act), specifically the broker-dealer exemption included in Section 202(a)(11); and provides a history of the SEC’s interpretation of the broker-dealer exemption in the Advisers Act. The Article then analyzes judicial treatment of broker-dealers, including the legal reasoning of why the Securities Exchange Act of 1934 (Exchange Act) provides a lower level of protection and was never meant to regulate personalized investment advice, examining a broker’s right to lie by the use of “puffery” and “sales talk”, and discusses the issue of financial advisors’ ability to “switch hats” and provide services under different standards of care. The Article concludes by opining how having two different standards of care regulating identical conduct is harmful to consumers and provides solutions for the SEC to move forward including the removal of the broker-dealer exemption from the Advisers Act and the creation of a new uniform fiduciary duty for broker-dealers and investment advisers under Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
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