Investment Industry Has Some ‘Splaining to Do

  • “[B]rokers’ recommendations must be consistent with their customers’ “best interest.(1)
  • “[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.”(2)
  • “[T]he suitability rule and the concept that a broker’s recommendation must be consistent with the customer’s best interests are inextricably intertwined.” (3)
  • In interpreting FINRA’s suitability rule, numerous cases explicitly state that “a broker’s recommendations must be consistent with his customers’ best interests.”(4)
  • “In interpreting the suitability rule, we have stated that a [broker’s] ‘recommendations must be consistent with his customer’s best interests.’”(5)
  • “[a]broker’s recommendations must be consistent with his customer’s best interests”(6)
  • “As we have frequently pointed out, a broker’s recommendations must be consistent with his customer’s best interests.”(7)

The debate over a possible uniform fiduciary standard for anyone providing investment advice to the public continues. The key issue continues to be whether to allow stockbrokers to continue to operate under a “suitability” standard that allows them to put their own financial interests ahead of their customers’/clients’ best interest, or require them to adhere to the fiduciary standard imposed on registered investment advisers, which requires them to always put their customers’/clients’ best interests first.

The answer would seem to be obvious. After all, what would be so onerous or unfair about making stockbrokers put their customers’/clients’ best interests first. Stockbrokers would still be allowed to earn commissions as long as the product being sold if fair and meets the fiduciary “best interests” standard.

But the investment industry would obviously prefer to be able to put their own financial interests first and continue a system which has, and continues to result in abusive practices and results at the public’s expense. Reports of new regulatory enforcement actions, customer complaints/actions and settlements are happen on an almost daily basis.

In their opposition to a uniform fiduciary standard, the investment industry continues to put forth two primary arguments. The first argument is that many investors will be deprived of valuable investment advice, as stockbrokers will not continue to serve them.

First of all, as a former compliance director, I am not sure about the actual value of the advice currently being delivered by stockbrokers. After all, that’s one of the main reasons for the predicament we are currently facing, as the charge is that such advice is often filled with conflict-of-interest issues, with advice that is more beneficial to the stockbroker than the investor.

The second argument is that forcing stockbrokers and their broker/dealers to create and maintain a compliance system based on the fiduciary standard’s “best interests” requirement would cost billions of dollars. Recent studies commissioned by the investment industry have put the estimated cost at $3.9 billion to $5 billion.

I have two comments about such projected costs. First, given the fact that the studies were paid for by the investment industry, obvious issues arise. These issues become more justified in light of the recent scandal involving the Brookings Institute’s self-serving study for the The Capital Group/American Funds, in which various negative accusations were made regarding the proposed uniform fiduciary standard.

I listed a sample of the various comments that have been made by the key regulatory bodies in the investment industry, the SEC and FINRA, to show that they have both clearly stated that stockbrokers have an obligation to act in the best interests of their customers/clients. Therefore, in order to be in compliance with FINRA’s regulations, broker-dealers should already have compliance programs in place to ensure that their brokers are acting in their customers’/clients’ best interests.

If that is the case, then there should be little, if any, additional compliance costs for broker-dealers to comply with a uniform fiduciary standard. Or are the investment industry’s claims of billions of dollars in additional compliance costs under a uniform fiduciary standard an admission that they are not in compliance with FINRA’s best interests requirement?

Despite this obvious inconsistency, I have yet to hear or read of anyone posing this very question to the investment industry. Hopefully the DOL and the SEC will recognize the inconsistency and not be misled by such empty rhetoric.

The investment industry has put themselves in the current position due to their ongoing abusive practices against investors. While not every broker-dealer and stockbroker is guilty of the offensive and abusive practices, the failure of the industry to properly address the issue has resulted in the current need for a uniform fiduciary standard to protect the public.

In closing, I once again ask the question that I have posed since the debate began – what is so onerous and unfair about requiring anyone providing investment advice to the public to always put the best interests of their customers/clients first?


1. FINRA Regulatory Notice 11-02, at 7 n.11; 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) (IA/BD Study)
2. IA/BD Study, at 4
3. FINRA Regulatory Notice 12-25, at 3
4. Raghavan Sathianathan, Exchange Act Rel. No. 54722, 2006 SEC LEXIS 2572, at *21 (Nov. 8, 2006); Scott Epstein, Exchange Act Rel. No. 59328, 2009 SEC LEXIS 217, at *40 n.24 (Jan. 30, 2009).
5. Dane S. Faber, 57 S.E.C. 297, 310, 2004 SEC LEXIS 277, at *23-24 (2004)
6. Wendell D.Belden, 56 S.E.C. 496, 503, 2003 SEC LEXIS 1154,at *11 (2003)


About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ 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 and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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