PIABA Bar Journal
The celebrated jurist Benjamin Cardozo opined that the fiduciary duty is “the duty of finest loyalty”, and that a fiduciary “is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” The question most customers have is whether their broker is subject to this duty of finest loyalty, or if they are bound merely by the morals of the marketplace. Currently this is a very difficult question to answer, and will depend on whether the customer is dealing with a broker or an investment adviser, where the customer is located, the type of account the customer has, among other things. However, the answer may be made clearer in the coming months.
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) on July 21, 2010, the Securities and Exchange Commission (the “SEC”) has been tasked with evaluating the effectiveness of the current legal or regulatory standards for brokers, dealer and investment advisers. Shortly thereafter, the SEC sought public comment on the issue. The next step will be for the SEC to decide what steps, if any, it should take to address the issues raised.
This article will examine the current standards applicable to brokers and investment advisers in their dealings with customers. It will then discuss what is required of the SEC pursuant to Dodd-Frank as well as various viewpoints on the topic.