Registered Representatives; No "Fiduciary" Duty For Now
A year ago, the SEC published its study commissioned under Dodd-Frank and recommended the implementation of a uniform fiduciary duty standard. Much debate has prevailed since that announcement. Will registered representatives be subject to the same fiduciary duty as investment advisors? Will registered representatives be subject to some form of hybrid fiduciary duty standard? According to a recent SEC announcement that went without much fanfare, in 2012, at least, the answer will be none of the above.
The SEC has punted once again on making a definitive conclusion regarding the implementation of a uniform fiduciary duty standard. Broker-dealers should not assume that there will never be such a standard, only that a formal adoption will be at least another year away. In that time, the SEC will surely complete the long-debated cost benefit analysis of the need for such a standard. Indeed, the SEC may ultimately conclude that the adoption of FINRA Rule 4530 and the changes to the suitability and know your customer standards were more than adequate such that there may be no need to have a formal standard. Registered representatives may already be effectively subject to their own fiduciary duty. Indeed, depending upon where you reside, courts have already concluded that you are subject to a fiduciary duty.
Regardless of what happens in 2013, once thing is for certain. FINRA is increasing its enforcement efforts and will surely focus on conformity with its new rules. The safest course for broker-dealers is to make sure you have adequate compliance programs to address this heightened regulatory environment, or you will be totally unprepared when there is a formal uniform fiduciary duty standard.
Comments (2)
Read through and enter the discussion by using the form at the endTraffic Ticket Lawyer - January 23, 2012 11:21 AM
How will FINRA increasing enforcement effect broker-dealers most?
Steve Garrett - February 4, 2012 2:31 PM
Fiduciary
Posted on February 2, 2012 by Steve Garrett
This year will bring the 40th anniversary of the day. I walked into the Pasadena, CA office of Merrill Lynch as a new account executive trainee. One of the first things I noticed was a plaque prominently displayed on the wall behind the receptionist desk that said, “The customers’ interest must come first.” It was a quote attributed to the founder of Merrill Lynch, Charles Merrill.
Over the past 40 years, I have learned a lot about the word fiduciary and how that plaque was the simplest plainest and best definition of what it is to be a fiduciary. With that in mind it is ironic that over the past 20 years or so the lawyers who represent Merrill Lynch before FINRA Arbitration Panels have routinely argued that their Registered Representatives should not be expected to act as a fiduciary. Maybe those lawyers are not aware of the history and background of Merrill Lynch and Charles Merrill. In many ways, it makes sense from a legal point of view to never agree that your representatives should be held to a fiduciary standard.
Accepting that idea does not preclude a different and better idea; even if you’re not bound to a fiduciary standard you should think like one. We know that people want to do business with the people they know, like and trust. Getting to know people and having them like you is what makes acting like a fiduciary so important Asking customers to trust you, and earning their trust, isn’t really such a ridiculous idea.
While key details remain to be determined the Securities and Exchange Commission is interested in this question and recently released a study that considers the differences between providing fee for advice compared to the commission business models. It’s not clear how any future proposals will evolve. FINRA believes the defining principle of fiduciary standard is simple: what’s in the best interest of customers. That seems like a full circle from what Charles Merrill said so many years ago.
It seems simple enough to me; trust has value and creating trust is dependent on thinking and acting like a fiduciary. Why would anyone representing any firm providing financial services to the public not understand such a simple idea?