Michael V. Seitzinger
Legislative Attorney
Brokers and dealers and investment advisers have been held to different standards of conduct in their dealings with investors. In very general terms, a broker-dealer is held to a suitability standard, and an investment adviser is held to a fiduciary duty standard. With passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), which tasks the Securities and Exchange Commission (SEC) with issuing rules concerning the standards of conduct for brokers, dealers, and investment advisers, the current standards may be changed.
The Financial Industry Regulatory Authority, a self-regulatory organization that oversees securities firms doing business in the United States and issues rules that the Securities and Exchange Commission may oversee, enforces a suitability standard for brokers and dealers. The standard requires that brokers and dealers assess their customers’ knowledge of securities and their financial situations and recommend securities that are suitable for their customers.
An individual investor wishing to pursue action against a broker-dealer for recommending an unsuitable investment will often have to allege the violation of the general anti-fraud provision of the Securities Exchange Act, section 10(b), and the SEC rule issued to implement the statute, Rule 10b-5. To pursue a section 10(b) violation, an individual plaintiff must allege that, in connection with the purchase or sale of securities, he relied on a misstatement or omission of a material fact made with scienter by the defendant and that this reliance caused his injury. Investors seeking to sue a broker-dealer for violation of the suitability rule may also have to comply with the requirements of the Private Securities Litigation Reform Act.
In contrast to the suitability standard, which is most often applied to broker-dealers, investment advisers usually have a fiduciary duty with respect to investors. An investment adviser comes within the requirements of the Investment Advisers Act. Although the Investment Advisers Act does not use the word “fiduciary” to apply to the standard of conduct to which an investment adviser is held in managing a client’s account, court cases have interpreted that an investment adviser has a fiduciary duty.
Changes to the standards of conduct applied to broker-dealers and investment advisers were present in both the House and the Senate versions of financial regulatory reform. However, the House and the Senate had different approaches to this issue. The House approach was to harmonize the fiduciary standard for brokers, dealers, and investment advisers. The Senate approach was to have the SEC conduct a study to evaluate the effectiveness of existing standards of conduct for brokers, dealers, and investment advisers. The House and Senate conferees on Wall Street reform approved a financial regulatory reform bill, called the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank forged a kind of compromise between the House and Senate approaches. Section 913 of the legislation, titled “Study and Rulemaking regarding Obligations of Brokers, Dealers, and Investment Advisers,” is the major provision setting out the new approach toward defining standards of conduct for these financial industry professionals. It requires the SEC to conduct a study to evaluate the effectiveness of the current legal or regulatory standards of care for brokers, dealers, and investment advisers and whether there are legal gaps, shortcomings, or overlaps in the standards. Criteria that the SEC must consider are set out. The SEC may issue new rules concerning the standards of conduct to be applied to brokers, dealers, and investment advisers.
Date of Report: March 24, 2011
Number of Pages: 12
Order Number: R41381
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
Legislative Attorney
Brokers and dealers and investment advisers have been held to different standards of conduct in their dealings with investors. In very general terms, a broker-dealer is held to a suitability standard, and an investment adviser is held to a fiduciary duty standard. With passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), which tasks the Securities and Exchange Commission (SEC) with issuing rules concerning the standards of conduct for brokers, dealers, and investment advisers, the current standards may be changed.
The Financial Industry Regulatory Authority, a self-regulatory organization that oversees securities firms doing business in the United States and issues rules that the Securities and Exchange Commission may oversee, enforces a suitability standard for brokers and dealers. The standard requires that brokers and dealers assess their customers’ knowledge of securities and their financial situations and recommend securities that are suitable for their customers.
An individual investor wishing to pursue action against a broker-dealer for recommending an unsuitable investment will often have to allege the violation of the general anti-fraud provision of the Securities Exchange Act, section 10(b), and the SEC rule issued to implement the statute, Rule 10b-5. To pursue a section 10(b) violation, an individual plaintiff must allege that, in connection with the purchase or sale of securities, he relied on a misstatement or omission of a material fact made with scienter by the defendant and that this reliance caused his injury. Investors seeking to sue a broker-dealer for violation of the suitability rule may also have to comply with the requirements of the Private Securities Litigation Reform Act.
In contrast to the suitability standard, which is most often applied to broker-dealers, investment advisers usually have a fiduciary duty with respect to investors. An investment adviser comes within the requirements of the Investment Advisers Act. Although the Investment Advisers Act does not use the word “fiduciary” to apply to the standard of conduct to which an investment adviser is held in managing a client’s account, court cases have interpreted that an investment adviser has a fiduciary duty.
Changes to the standards of conduct applied to broker-dealers and investment advisers were present in both the House and the Senate versions of financial regulatory reform. However, the House and the Senate had different approaches to this issue. The House approach was to harmonize the fiduciary standard for brokers, dealers, and investment advisers. The Senate approach was to have the SEC conduct a study to evaluate the effectiveness of existing standards of conduct for brokers, dealers, and investment advisers. The House and Senate conferees on Wall Street reform approved a financial regulatory reform bill, called the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank forged a kind of compromise between the House and Senate approaches. Section 913 of the legislation, titled “Study and Rulemaking regarding Obligations of Brokers, Dealers, and Investment Advisers,” is the major provision setting out the new approach toward defining standards of conduct for these financial industry professionals. It requires the SEC to conduct a study to evaluate the effectiveness of the current legal or regulatory standards of care for brokers, dealers, and investment advisers and whether there are legal gaps, shortcomings, or overlaps in the standards. Criteria that the SEC must consider are set out. The SEC may issue new rules concerning the standards of conduct to be applied to brokers, dealers, and investment advisers.
Date of Report: March 24, 2011
Number of Pages: 12
Order Number: R41381
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
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