Due Diligence

Fiduciary Debate Is Moot, Brokers Are Fiduciaries, Says Columnist

Updated: I originally stated that under federal securities laws, brokers are only held to a fiduciary standard in discretionary accounts, but this is incorrect. In fact, brokers who provide advice on non-discretionary advisory accounts (which replaced the old fee-based brokerage accounts after the FPA won its lawsuit against the SEC to overturn SEC Rule 202, the so-called Merrill rule, in 2007) are also held to a fiduciary standard. Only pure commission accounts do not require the broker to adhere to a fiduciary standard today.

What's all the fuss about the "F" word, asks Lockwood Group co-founder and securities lawyer John Lohr in a column today in Advisor Perspectives. Brokers are already held to a fiduciary standard, he says. Indeed, breach of fiduciary duty is the number one charge cited in arbitrations against brokers and broker/dealers and has been for many years.

On the one hand, he's right. Brokers can be held to a fiduciary duty under certain state laws. But the big debate in Washington with Dodd-Frank was over federal laws, which Lohr does not address in his column. Under current federal securities laws, brokers are only held to a fiduciary standard when they provide advice to clients in fee-based "advisory" accounts, both discretionary and non-discretionary, whereas investment advisers are always held to a fiduciary standard.

Otherwise, why would the SEC need Congress to give it special authority to create a rule that would hold brokers to a fiduciary standard? Without explicit legislative permission, the SEC would not have been able to create such a rule.

Why does the distinction between state and federal laws matter? Because the SEC does not currently enforce the requirement for a fiduciary duty in its examinations of brokers and broker/dealers, says Kristina Fausti, director of legal and regulatory affairs for Fi360. "Because there are these legal distincitions, investors don’t always have the protections they think they have. That’s what the debate is really about," says Fausti. "Their broker may have certain conflicts or be compensated in a way they just do not understand. Because the broker is being compensated in certain way, the best interest of the client can be compromised. Because there is no explicit legal requirement that the broker adhere to the fiduciary standard."

Read on for an excerpt from Lohr's column:

From Lohr's column: "The concept of fiduciary duty is a common-law principle that applies to parties who deal with other parties' money. The fiduciary trust principle has applied since the basis for common law was established, with the Domesday Book in 1086. ERISA codified it for employee benefit plans in 1974, and various state acts like the UPIA, UMIFA and the UTA have codified it for non-employee benefit plans since.

In deciding whether or not someone has fiduciary responsibility, federal and state courts and local arbitrators have for years applied an intricate legal theory of function over form – the “duck theory.” If it looks like a duck, walks like a duck, smells like a duck, and acts like a duck, it’s a duck. This standard applies to all money held or managed for someone else. Fiduciary status is defined by the actions and understandings of the parties in question. If a client believes the advisor or stockbroker is acting in a fiduciary capacity and relies on that belief, the advisor or broker will be held to a fiduciary standard."

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.