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Brokers and investment advisors: in your best interest?

honig-stephenTautology: needless repetition of an idea, statement or word.

— Merriam-Webster Dictionary

You invest in public securities, sometimes through your investment advisor, sometimes through your stock broker. The legal obligations each historically owed to you were different. Under new SEC regulations, now each may owe you the same level of legal duty — or not.

The path to this unclear result has been bloody, the issues not yet fully resolved. Stay tuned. Below is a summary of the present state of play.

Old law

Assuming absence of outright fraud, your broker owed you the obligation of selecting “suitable” investments, given what he knew about you after due inquiry. An investment advisor owed you a fiduciary duty, higher than suitability.

The Investment Advisors Association defined that advisor duty as an affirmative duty of care, loyalty, honesty and good faith, acting in the best interests of the client, requiring a reasonable basis for an investment advice, seeking best transaction execution, complying with client objectives and strategies, treating a client “fairly,” and making full disclosure of conflicts of interest.

Beleaguered investors often brought suit against brokers or advisors; each suit was highly fact-dependent, there seemed no bright line for liability, and courts applied these principles as best they could.

The 2010 Dodd Frank Act granted the Securities and Exchange Commission the power to define the obligations of securities professionals to clients, but it is not the only federal agency with this power.

In 2016, the Department of Labor promulgated its own strict “fiduciary rule” defining the obligations of securities professionals owed to clients subject to DOL regulation: employee benefit plans, retirement plans, profit-sharing plans, IRAs. (DOL does not supervise taxable security accounts or accounts funded with after-tax dollars.)

The rules fell immediately under attack from both Congress and the brokerage industry. In February 2017, President Trump issued a memorandum seeking to delay implementation by 180 days, and, after extensive litigation, the 5th U.S. Circuit Court of Appeals vacated the DOL rules in June 2018.

The high fiduciary standard, binding under the DOL rule for financial salespersons including brokers, advisors, planners and insurance agents, was dead.

June 5 SEC action

By vote of three commissioners to one, the SEC this past June adopted a series of “Actions” that altered the regulatory landscape for both brokers and investment advisors.

The SEC press release stated that the Actions were “designed to enhance and clarify the standards of conduct applicable to broker dealers and investment advisors, help retail investors … and foster greater consistency on the level of protections … .”

New Regulation BI imposes on brokers an obligation to act in the “best interest” of retail clients. The SEC articulated that standard as higher than mere suitability. BI requires detailed written disclosures to investors, and imposes a duty of care, disclosure of conflicts of interest, and an obligation of legal compliance. Disclosure under new Form CRS requires detailed information about the nature of the relationship, fees, disciplinary history and standards of conduct. The new brokerage rules are effective in June 2020.

The SEC also clarified that a broker need not also register as an investment advisor when a broker makes securities recommendations that are “solely incidental” to the conduct of the broker dealer’s business with no separate compensation.

The standard of conduct for investment advisors became subject to a new Fiduciary Interpretation, effective upon publication in the Federal Register in June. The duties of care and loyalty are to be applied to the entire relationship in a principles-based manner. Advisors were also made subject to the CRS disclosure requirement.


The Actions were championed by SEC Chairman Jay Clayton, an accomplished Wall Street attorney with capital markets experience, and were supported by the conservative commissioners.

There followed a violent attack against the Actions, asserting that the increased obligations on brokers still were inadequate as failing to impose a full fiduciary duty, and that the Fiduciary Interpretation of the advisor fiduciary duty weakened it.

The Actions were systematically criticized by SEC Commissioner Robert J. Jackson Jr. (who voted against them), damned by faint praise from the SEC’s own “investor advocate” Rick Fleming, critically examined by the New York Times, tagged as confusing at best by Forbes, and subject to immediate state-level efforts to impose higher performance standards.

Perhaps the most detailed critique was in an article in Vanity Fair (of all places), characterizing the SEC pronouncements as “Orwellian” and the result of “the Trumpification of the SEC.”

At the same time, SIFMA (a trade association representing broker interests), which had been a staunch opponent of a fiduciary standard, praised the Actions as enhancing investor protections by establishing a more stringent broker standard, while not commenting on the alleged erosion of the standards applied to advisors.

Less than three weeks after the Actions, the “Waters Amendment” was introduced into the House of Representatives which proposed barring the SEC from implementing, administering, enforcing or even publicizing Reg BI against brokers.

SIFMA forthwith issued a press release and sent a letter to all members of the House supporting Reg BI and warning of confusion if publicity and enforcement were banned while the Actions remained on the books.

Who’s correct?

On July 8, at a conference in Boston, Chairman Clayton mounted a robust and systematic defense of the Actions. His remarks elucidate SEC rationale.

We start with the brokerage broker in Regulation BI. There seems little argument that the new standard is an advance on “suitability.” Clayton dismissed the balance of the critique as, variously, misunderstanding what was said, plain erroneous views, or expression of just an alternate preference for a policy approach.

He dwelled on benefits to retail customers, who should have the right to select how their securities transactions are undertaken; using a broker for specific transactions, at a low transaction cost, is a valid choice.

He rejected the suggestion that brokers should have an ongoing obligation to monitor the portfolio; that would be a different service, and brokers should not be forced to fulfill an ongoing (and more costly) investment advisory function.

Noting that BI imposes an obligation of care that includes suitability, he further asserted that BI expands the duties of brokers, who now must apply BI standards not only to trades but also to account recommendations (for example, whether to roll over or transfer retirement account assets to an IRA).

Clayton’s analysis is persuasive, but four thoughts suggest an awareness that perhaps BI did not end up as fully robust:

  • First, the broker trade group (SIFMA) was intensely opposed to articulating the broker standard as fiduciary, and pounced on defense of Regulation BI against all attacks;
  • Second, the effective date of BI is delayed one year, seemingly anticipating need for retooling brokerage practices that might be too lax;
  • Third, Clayton states that “best interest” is purposely not defined; and
  • Lastly, buried in a footnote to the print version of Clayton’s remarks is the comment that the BI articulation is appropriate because “a standard that is not properly calibrated will result in broker-dealers exiting the market … .”

Clayton’s defense of the Fiduciary Interpretation of the advisor duty is simpler: case law and SEC practice make it clear that an advisor’s duty is indeed fiduciary; it is misguided to define fiduciary duty as an absolute absence of conflicts of interest as some conflicts inhere in some relationships; neither the Fiduciary Interpretation nor Regulation BI protect investment professionals by reason of disclosure alone, as each requires a substantive bundle of articulated duties.

State responses

While a deep dive into state law is beyond the scope here, note that a minority of states are considering their own fiduciary duties for brokers, advisors and/or insurance salespeople either across the board or for certain classes of clients (such as nonprofits or retirement plans).

Two states of particular interest recently have initiated procedures to globally toughen the standards set forth by the Actions.

New Jersey’s Division of Consumer Affairs has introduced a “Proposal,” the title of which says it all: “Fiduciary Duty of Broker-Dealers, Agents, Investment Advisers, Adviser Representatives.” The same fiduciary duties would apply to everyone. SIFMA, on behalf of the brokerage community, replied with a 23-page letter in opposition of applying fiduciary standards to brokers, citing legal authority and financial impact on New Jersey investment professionals.

On June 14, Massachusetts Secretary of State William F. Galvin announced for public comment a similar regulation, fixing uniform fiduciary standards on both brokers and advisors. The public comment period ending July 26 makes speculation on outcome premature at this writing.

Finally, secondary sources suggest that four states have imposed fiduciary duties on brokers through judicial rulings: California, Missouri, South Carolina and South Dakota.


The Action’s seemingly differing standards of conduct for financial professionals will meet their acid tests in court (or arbitration) when aggrieved investors bring claims.

Retail investors don’t care about fine definitional distinctions, but rather trust that most professionals are honest and competent, and that the government catches the ones who are not (an assumption not always proven accurate, but that is another story).

Nor are the different standards contained in the Actions so different, as between brokers and advisors, when you closely read the entire texts.

We lawyers are intimately concerned with precise words and make a living by parsing them. But if you take a step back and ask yourself, is there a critical distinction in the bottom-line standards for brokers and advisors (considering their different job descriptions), or is the debate a mere tautological exercise, the implicit answer is intriguing.

Stephen M. Honig practices at Duane Morris in Boston.

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