It’s time to hold Wall Street accountable for meeting the standards of conduct that it promises to its customers. President Obama’s proposed regulatory overhaul contains a significant provision that should end any confusion about whether a broker has to act in your best interest or can just pitch a product, according to recent articles by Alexis Leondis and Elizabeth Hester in Bloomberg.com, and Jane J. Kim and Aaron Lucchetti in the Wall Street Journal. That provision would leave no doubt that brokers are required to meet a higher fiduciary standard that compels them to place their customer’s interests ahead of their own. Fiduciaries are not allowed to engage in self-dealing. This is reportedly “a change that could upend Wall Street.”
Why would holding brokers to a fiduciary standard upend Wall Street? Because, although Wall Street firms would like you to believe they place your interests ahead of theirs, just the opposite is true. In their advertisements Wall Street firms portray themselves as “trusted financial advisers,” but, when customers try to hold them to that standard, they argue that they are just “used securities salesmen.” The big firms seems to have a philosophy that bad publicity from the frauds and scandals that we read about is nothing that good advertising can’t cure. So, after the analyst fraud scandals (“Let’s put some lipstick on this pig”), we saw ads portraying brokers as friends and confidants of their customers. Those ads were about as credible as Jeb Bush’s assertion that being the President’s son was a disadvantage he had to overcome, but they worked.
The truth is most brokers already have fiduciary duties when they solicit their customer’s trust and provide investment advice. In fact, most firms solicit such trust when they hold their brokers out as financial advisors or financial consultants. In a speech delivered May 7th at the Advisers Association’s annual conference, SEC Commissioner Luis Aguilar said that broker representatives increasingly provide investment advice, and such advisors have “an affirmative obligation to put a client’s interest above his or her own.” Aguilar warned that other “proposed standards may have the effect of diluting the existing high fiduciary standard that serves an as important investor protection.”
Whether by agreement, advertising, promises, or undertaking to act, brokerage firms and broker representatives increasingly offer an ongoing advisory and monitoring component in exchange for compensation. As Commissioner Aguilar points out, that brings those firms and representatives within the Investment Advisors Act of 1940, which imposes a fiduciary duty on such advice providers.
The big change will come when more arbitrators get serious about holding brokers to their fiduciary duties. “If a fiduciary violates his duty–that is, gives advice which is contaminated by self-interest–he could be sued not only for damages that have been caused for this advice but could also be sued for punitive damages,” says Tamar Frankel, an expert on fiduciary law at Boston University School of Law. President Obama’s proposal clarifying those fiduciary duties would help formalize the standard of care that Wall Street firms owe their customers.
J. Boyd Page, senior partner of Page Perry in Atlanta, noted “this proposal would make it clear to arbitrators, jurors, courts and regulators that brokers must satisfy a high duty of care in dealings with their customers. They would be held to the high standards required of other professionals. Unfortunately, in far too many cases, brokers have avoided legal responsibility for their actions by arguing that they do not owe affirmative duties to their customers.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing investors in securities cases. For further information, please contact us.