Fiduciary Duties and Investment Professionals: What’s the Big Difference?

The Securities and Exchange Commission (SEC) is currently considering whether investment advisers and securities brokers should be held to the same standard of care when dealing with clients. The uniform fiduciary standard was authorized under the Dodd-Frank financial reform law and has been hotly debated since 2011.

While the fiduciary standard already applies to financial advisers, brokers who do not exercise discretionary or other control over their customer’s account are currently held to a much lower “suitability” standard. In broad terms, brokers are only required to recommend securities that meet a client’s investment goals, given factors such as age, health, investment sophistication and risk tolerance. For brokers who are mere order takers, it seems fair not to impose the financial adviser’s fiduciary duty upon them.

The fiduciary standard would require both brokers and advisors to act in their clients’ best interests and disclose to them all conflicts of interest. It is intended to harmonize regulations for advisers and broker-dealers and ease confusion among investors.

Earlier this spring, the SEC issued a request for data from the public and interested parties about whether to adopt a uniform standard of conduct for broker-dealers and investment advisers. The agency highlighted that many investors are unaware that while advisers are obligated to act in their clients’ best interest, brokers do not have the same obligation.

“Studies have shown that few investors realize that the standard of care they receive depends on the type of investment professional they use. And often investors do not know which type of financial professional they are relying on,” said acting SEC Chairman Elisse B. Walter. “This request for information will help us in our ongoing consideration of alternative standards of conduct for certain broker-dealers and investment advisers, as well as potential harmonization of other aspects of regulation in this area.”

The deadline for comments was last Friday. While it is unclear when the SEC may formally propose new regulations, the debate is continued to extend into the summer.

If you have any questions about the duty of care to investors or would like to discuss the legal issues involved, please contact me, Dan Brecher or the Scarinci Hollenbeck attorney with whom you work.