Are Existing Stock Broker Standards Sufficient? Principles, Rules, and Fiduciary Duties

Abstract

The recent catastrophic collapse of the financial industry, coupled with the shocking revelation of the Madoff scheme, led many to believe that the securities industry needed more regulation and supervision. Many fear that a stock broker does not have a fiduciary relationship with their clients based on their transaction, as they are merely vehicles through which the investor places his money in the market, which is exactly what Goldman Sachs contested throughout the recent prosecution against them. Although many hoped that this question would be answered via the outcome of the Goldman lawsuit, the subsequent settlement put those hopes to rest. Many observers of this result identified a perceived need for more explicit recognition of broker-dealer fiduciary duties. However, it would have been more accurate to describe this as enhancing fiduciary duties since it has long been the case that stock brokers owe fiduciary duties when acting in certain capacities, as the author describes in the Article in great detail. As the financial reform legislation developed, controversy arose as to whether to statutorily impose new fiduciary duties. Investor-protection advocates supported such a move; the industry and others opposed it. To the extent that these duties already exist, the suggestion may have been less meaningful than thought by its advocates. In any event, the final legislation eschewed a statutorily mandated fiduciary duty. Instead, Congress directed the SEC to conduct a study to identify any gaps, shortcomings, or overlapping regulation regarding standards of conduct and supervision requirements applicable to broker-dealers and investment advisers in what is now referred to as “Dodd-Frank.” The upshot of the new legislation is that broker-dealer standards of conduct will continue to develop piecemeal through rulemaking and case law developments. The Article concludes that although some additional rulemaking may be warranted as a conceptual matter, the current approach to broker-dealer obligations is appropriate and provides an adequate basis for vigorous enforcement of broker-dealer obligations notwithstanding some apparent enforcement lapses in a few celebrated cases. The law, regulations, and regulatory interpretations to date make clear that broker-dealers have fiduciary or fiduciary-like obligations when they provide services beyond executing customer orders. There are many examples of such obligations presently in existing law. In fact, any time a securities broker acts as something more than a mere order taker, heightened obligations attach. There is no doubt that expressly stating that broker-dealers are fiduciaries will provide further emphasis on their obligations. However, even in the absence of a legislative or regulatory declaration to that effect, heightened standards for broker-dealers are already well established.