SEC to Discuss Uniform Fiduciary Standard Rule for Brokers

According to a recent article in Investment News, Chairman of the Securities and Exchange Commission, Mary Jo White, wants the SEC to decide as soon as possible whether to propose a rule that would raise the standards for investment advice given by brokers. Securities fraud attorneys say a rule of this kind would play a significant part in protecting investors and could make it easier to determine misconduct in securities arbitration.

Stock fraud lawyers expect the commission, which consists of five members, will be split on this controversial issue. A cost-benefit analysis is being conducted by the SEC regarding a potential rule. In an interview, SEC Commissioner Daniel Gallagher said the potential rule hasn’t been a “front burner issue,” but it soon will be.

“We really need to decide, based on what we’ve seen, whether it makes sense to move forward,” Gallagher stated.

Currently, brokers must only adhere to a “suitability standard” in which they only have to make “suitable” recommendations. They have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance.

On the other hand, financial advisers are bound by fiduciary duty. According to securities fraud attorneys, this is a much more rigid standard than the suitability standard. In order to act within fiduciary duty, the financial advisor must, by law, act in the best interest of his or her client. It is not enough that the investment be suitable, but they must also be in the client’s best interest.

Stock fraud lawyers say that the Dodd-Frank financial reform law authorized a rule imposing a uniform fiduciary standard, but did not require it. However, the SEC will be focusing on a crowdfunding rule first. Reportedly, it is possible that the crowdfunding rule will come this fall.