Implementing a Fiduciary Standard for Brokers

June 18, 2009

When I read this article I was a little surprised.  I suppose this is because it seems intuitively that a broker ought to have a fiduciary duty toward the client.  It seems that that standard has yet to be implemented.  Of course the new administration is planning to implement its new regulatory scheme.  “Harmonizing” of the securities regulations has been a clarion call among progressives for some time now (see: Richard Carlucci, HARMONIZING U.S. SECURITIES AND FUTURES REGULATIONS 2 Brook. J. Corp. Fin. & Com. L. 461).

If the brokers didn’t have a fiduciary duty before, who did?  The answer, the bank acts as trustee:

(ii) Trust activities. The bank effects transactions in a trustee capacity, or effects transactions in a fiduciary capacity in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards. 15 USCS § 78c (a) (4) (B) (ii)

Meanwhile, the broker have a some very broad powers, without any of the liabilities of a fiduciary:

All broker-dealers, with the exception of those doing purely intrastate business, are required to register with the SEC. Employees of broker-dealers  are considered “registered representatives” and do not have to register with the SEC, but they are required to register with the NASD. Upon registration, broker-dealers must adhere to a minimum net capital requirement based on one of two standards: Either they may not allow their aggregate indebtedness to exceed 800% of their net capital, or they may not allow their net capital to be less than $ 250,000 or 2% of their calculated Reserve Requirement, whichever is greater. (supra, 2 Brook. J. Corp. Fin. & Com. L. 46).

Clearly there is something regulatory scheme is insufficient.  As one commentator notes:

Brokers are not fiduciaries when they act as brokers, but the distinction has, for the most part, been lost over the years, as brokers take a more advisory role in their relationship with their customers, and many brokers today offer advisory services to their customers. Mark J. Astarita Administration Plans Fiduciary Standard for Brokers


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