One of the greatest philosophers of our time, Yogi Berra, must have had the debate over the uniform fiduciary duty standard when he penned this line.  Yes, believe it or not, the debate is about to resume.

The SEC is yet again working on possible recommendations regarding a uniform fiduciary duty for investments advisors and broker-dealers.  In accordance with Dodd-Frank, the SEC is expected to issue a request for information for economic data to determine the viability of such a standard.

All of the debate seems like much ado about nothing.  There is generally widespread industry support for a uniform standard, as long as it takes into account the nuanced differences between investment advisors and broker-dealers.

Although the standard will likely become reality in some form, is all of this time and money being spent on the debate really worth it.  In my years of defending broker-dealers, courts and arbitration panels already have routinely imposed a fiduciary duty standard on broker-dealers.  Indeed, it is common for a broker-dealer’s WSPs to state that the associated persons owe a fiduciary duty to their customers. 

It seems to me that the only real benefit of havinpointing.jpgg a uniform standard is to have courts and arbitration panels apply one standard, as opposed to multiple and inconsistent application to a floating standard.  A uniform fiduciary duty will exist, the only question is whether we will all live to see it.

The late great comedian, George Carlin, was made famous by his routine, “The Seven Dirty Words You Can Never Say On Televisions”.  Likewise, fraudsters do not want compliance personnel to ever mention the 13 common dirty traits that may uncover a fraud.

Although not as funny as George Carlin, focusing on these traits may be the key to a firm’s survival.  In no order of significance, you should look for people who do the following:

1.         Never takes a vacation;

2.         Live beyond their means;

3.         Too much debt relative to income (creditors calling the place of employment);

4.         Possess an attitude that they are above the system;

5.         Suspicious of having others check their work;

6.         Extreme behavior changes to either extreme (depression and euphoria);

7.         Set unrealistic personal goals;

8.         Unexplained spike in production;

9.         Spouse loses a job;

10.       Divorce (i.e., a property distribution);

11.       Drug or alcohol abuse;

12.       High number of elderly clients (or any other affinity group concentration); and

13.       Consistently offering new product lines for investing.

So what does the list of 13 suspect behaviors mean for member firms and investment advisers?  You must do all you can to know your personnel as well as you need to know your customers before making an investment recommendation.fraud.jpg

The better you know your team, the better prepared you will be to notice any of these ugly traits.  You will notice erratic behavior or behavior that is simply out of the norm.

Certainly everyone going through a divorce or an alcohol problem are not fraudsters, but traits in combination may be the sign of trouble.  Do more due diligence over your personnel when any of these traits arise.

Protect yourself and the firm.  There are fraudsters under every rock.  You just need to identify those rocks needing to be turned over. 


*Photo from

With the east coast in the midst of Hurrican Sandy, I am sure we are all thinking about a nicer place right now.  Apparently, the Seventh Annual National Institute on Securities Fraud is November 15-16, 2012 in New Orleans. For more information and to register, call 800-285-2221 or log on to:

 A simple review of FINRA’s enforcement proceedings demonstrates a new norm; compliance officers are being held accountable as supervisors for rules violations.  How can a compliance officer avoid being held accountable as a supervisor?

The best way for compliance to insulate yourself is to make sure that there are clear divisions between compliance and supervisory duties.  For one, compliance officers should not be managing the day to day operations of the firm, such as hiring and firing personnel.  Instead, compliance should only make “recommendations” to supervisors when it comes to compliance issues.

Another effective tool is to have separate written supervisory procedure manuals for supervisors and compliance officers.  The firm may call the manuals two different things as well.  For example, you may want to call the compliance manual the “ethics” manual and the other the “supervisors’ manual”. 

Similarly, in those manuals, you should define the roles of those in a supervisory versus compliance capacity.  Depending upon the size of the firm, you may want to consider naming in your manuals the individuals who serve in those capacities.  The manuals should be revised every year to reflect personnel changes.

One last method to consider is for the chief compliance officer to ask the supervisors on a monthly basis whether they are aware of anything requiring a Rule 4530 disclosure. 

This guidance is no guaranty that a regulator will not try to couch compliance as supervision, but doing nothing is not an option.  Define roles, act separately, and protect yourself from being miscast as a supervisor.

Although the SEC’s Dodd-Frank mandated report that there should be a uniform fiduciary duty standard for broker-dealers and investments advisers is nearly two years old, we are no closer to seeing that become a reality.  The question is why. 

Some see the lack of a majority of SEC Commissioners in support a draft request for public input as the cause for delay.  The stall may continue as long as the Commission remain currently constituted.  Others think that the Department of Labor’s forthcoming rule on the definition of a fiduciary under ERISA as a possible development that may break the logjam. 

The real question that must be asked is whether a uniform fiduciary duty standard is even worth the effort.  

In the many cases that I have defended broker-dealers, it is hard to recall any where the claimant did not assert a claim for breach of fiduciary duty.  Moreover, many arbitrators that I have observed make the general assumption that a broker-dealer serves as a fiduciary for its clients.  In addition, some courts have already concluded that broker-dealers are fiduciaries to their customers. 

In my view, the push, to the extent that one even remains, is one of optics.  In other words, there is a perception that the public wants to see there be such a standard so some will continue to push for it.  If anyone analyzed the issue hard enough, they would probably see that broker-dealers are already often held to such a standard, such that the effort to legislate it is one that is not needed.

The SEC’s obligation to review its proposed rules through a cost-benefit analysis has been under fire for quite some time.  More recently, the SEC has been especially criticized in failing to apply this approach in a meaningful way when it came to its review of a potential uniform fiduciary duty standard for those who provide investment advice.  This criticism has resulted in the repeated delays of any rule-making on the uniform fiduciary duty.

To address this issue, Representative Garrett (R-N.J.) has advanced a bill that would reinforce the cost-benefit analysis.  Although the timing of this legislation may result in it being delayed until after the election, the goal is for the SEC to “clearly identify” the issue that the proposed rule intends to address; include the SEC’s chief economist in the costs-benefit analysis; and assess potential regulatory alternatives to rule-making.

The proposed legislation is not that far off from the SEC’s internal guidance, directing staff to enhance economic analysis as part of the rulemaking process for both congressionally mandated and discretionary rulemaking.  Representative Garrett does not believe that the SEC internal mandate goes far enough to ensure the adequate application of the cost benefit analysis, which is why he wants it defined by statute. 

Wherever you fall on this debate, the one thing that the fiduciary duty debate has demonstrated is that the SEC is taking a more measured cost-benefit approach to its rule-making.  Doing so can be seen as a bit of self-preservation on the part of the SEC, but it will also likely lead to better rule-making and, in turn, rules that will withstand scrutiny.

The Department of Labor’s head of the Employee Benefits Security Administration recently announced that the DOL is going to coordinate with the SEC on fiduciary policy, but that the DOL and SEC will maintain and pursue their own regulations.  This statement has garnered confusion and concern by many in the industry, as it should.

The primary concern with such a statement is that the SEC and DOL operate under different fiduciary duty standards.  The securities laws focus on disclosure, while the retirement law fiduciary duty that the DOL enforces prohibits conflicts of interest.  As such, how can the DOL and SEC coordinate their respective fiduciary policies when they operated under different standards.  In response to such concern, the DOL stated that there would not be one standard, but that the two will be compatible.

The DOL like the SEC has been struggling with its own fiduciary duty standard, resulting in it withdrawing a proposed fiduciary duty rule in September 2011.  Dodd-Frank vested the SEC with the authority to develop a uniform fiduciary duty standard over anyone who provides retail investment advice.  The SEC has yet to develop such a standard and has tabled doing so through the balance of 2012.

The overall uncertainty created by the respective inability of the SEC and DOL to develop a fiduciary duty standard leaves many in the retirement planning arena in the dark, leading some opponents to question whether this is even necessary.  The bad apples ultimately float to the top and can be removed from the barrel through enforcement mechanisms.  While the debate rages, confusion reigns.  Either clear rules should be adopted or the process abandoned.  The state of unrest does not help anyone.

Chairman Ketchum is seeking new areas of growth for FINRA.  At FINRA’s annual meeting, Ketchum stated that he wanted to see FINRA take on the role as regulator for both retail professionals and institutions.  He also wants greater market transparency through the use of audited quote and trade systems.  Ketchum stated that he wants to see investors increase their use of BrokerCheck — the system the public can use to check the background of registered representatives and broker-dealers — so the investing public can better protect itself.  Despite this push from FINRA to grow its reach, the number of broker-dealers has been in decline.

One reason for this decline could be the increase in user fees that FINRA charges.  Another reason for the decline is the attractiveness of the registered investment adviser model, who are currently subject to SEC or state oversight depending on their size.  The SEC only examined 8% of RIAS last year, while FINRA examined 58% of its members in the same time period.  As such, RIAs are generally opposed to FINRA become their SRO, asserting that the FINRA rules-based business model does not mesh with their fiduciary duty business model.  The apparent decreased oversight of RIAs may be the ultimate reason for the decrease in broker-dealers and the increase in RIAs, which, in turn, is the likely reason that FNRA is pushing to become the SRO for RIAs.

From Ketchum’s remarks, FINRAs growth model can be seen as a transparent effort to demonstrate to Congress and the SEC that it has the capacity to take on new and greater tasks.  In other words, to support FINRA’s claim that it is the best choice to become the SRO for RIAs.  This political debate will likely rage on through the summer; all the while FINRA will try to do more and more to increase the perception that it is the best choice.  In the end, the most likely choice still seems to be a better funded and more active SEC.  We shall see . . .  


The Department of Labor has a rule pending that would impose a fiduciary duty standard for investment advice pertaining to retirement plans.  Like the resistance faced by the SEC in its attempt to create a uniform fiduciary duty for retail investment advice, the DOL has faced similar resistance, with calls for a cost-benefit analysis before imposition of such a standard.

Opponents to the rule say that the cost will not outweigh the benefits of this heightened standard of care.  Skeptics of the pending rule suggest that it will drive brokers out of the IRA market so that they can avoid being confronted by a fiduciary duty standard.  Some critics believe that the DOL is targeting a non-existent problem.  Others claim that the rule would deprive small investors from obtaining IRA advice as brokers leave the business. Advocates of the fiduciary duty assert that such a rule will require brokers to provide unbiased advice.

Wherever the DOL lands on this issue, I believe that it should, like the SEC, conduct a cost-benefit analysis to really determine if (1) such a rule is needed and (2) do the benefits of the rule outweigh the costs incurred to impose such a rule.  Only after the completion of this analysis could we objectively say it is a good thing and will be deployed in a cost effective manner.


The 11th Circuit Court of Appeals recently vacated a FINRA arbitration panel arbitration award because the panel had failed to decide if the securities firm had waived its right to arbitration by engaging in litigation. 

The arbitration arose out of a bond offering and a dispute between underwriters.  Ultimately, there was an arbitration award that was later confirmed by the federal District Court.  The 11th Circuit stated that the district court did not consider the waiver issue of the party’s litigation conduct.  However, in vacating the award and remanding, the court did say that the district court, if it concluded that no waiver occurred, may then re-enter its order confirming the arbitration award.

This is an interesting decision because it does permit some insight into the courts’ reasoning as it relates to a review of arbitration awards.