Done Deal: The SEC, NASD and FINRA on the Fiduciary Standard

– As we have frequently pointed out, a broker’s recommendations must be consistent with his customer’s best interests. (Wendell D. Belden, Exchange Act Rel. No. 34-47859, 2003)

– As we have frequently stated, a broker’s recommendations must be consistent with his customer’s best interests. (Raghavan Sathianathian, Exchange Act Rel. No. 34-54722, 2006)

– A broker violates the suitability rule when he puts his own self-interest ahead of the interests of his customers. (Scott Epstein, Exchange Act Rel No. 34-59328, 2009)

– In determining whether a fund is suitable for an investor, a member should consider the fund’s expense ratio and sales charges as well as its investment objectives. (NASD Notice to Members  95-80, September 1985)

– The suitability requirement that a broker only make those recommendations that are consistent with the customer’s best interests prohibits a broker from placing his or her interests ahead of the customer’s interests. (FINRA Regulatory Notice 12-25, fn. 16)

– A broker’s recommendations must serve his client’s best interests…. (Dept. of Enforcement v. Bendetsen, 2004 NASD LEXIS 13, at *12)

– [A] central aspect of a broker-dealer’s duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the best interests of his customer. (“SEC Staff Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,” at 59 (Jan. 2011)).

The SEC and the NASD/FINRA have clearly endorsed a “best interests” requirement for brokers. And yet, various leaders of the financial services industry continue to predict disastrous results if the DOL adopts a universal fiduciary standard. So is that an admission by the financial services industry that they have not been in compliance with the SEC’s and FINRA’s requirements? Or is that an admission that they cannot operate profitably if they are required to comply with the SEC’s and FINRA’s “best interests” requirement?

Even more perplexing is the SEC’s ongoing refusal to adopt a universal fiduciary standard for brokers, when there are numerous enforcement decisions upholding the “best interests” standard, the cornerstone of fiduciary law. How can the SEC ignore its own enforcement decisions?

The decisions I have cited are but a few of the regulatory decisions holding brokers to a “best interests” standard when dealing with the public. As noted above, some decisions have also upheld the “best interests” standard under the regulatory rules requiring fair dealing with the public.

And yet, in all the stories that I have seen addressing the ongoing battle over a universal fiduciary standard, I have yet to see one writer address the fact that regulatory decisions, such as I have cited herein, have already established the duty to always act in a customer’s “best interests.” I have yet to see one story addressing the failure of the current SEC commissioners to respect and enforce such decisions in order to protect the public in accordance with the SEC’s mission statement.

It’s time to hold the SEC and FINRA accountable for failing to recognize and enforce the “best interests” standard established by its enforcement decisions and provide the public with the protection they deserve.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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