On January 21, 2011, the Securities and Exchange Commission (“SEC”) released its Congressionally mandated study on the effectiveness of current legal and regulatory standards for broker-dealers and investment advisers (the “Study”). The Study was prepared by the SEC staff and does not necessarily reflect the views of the five SEC Commissioners who must ultimately decide what, if any, rules should be adopted. Two of the Commissioners dissented from the decision to release the Study based on their concern that the Study failed to adequately support its position with empirical data. Nonetheless, the Study should be viewed as another step towards the likely imposition of a fiduciary standard for broker-dealers.
Historically, investment advisers are considered “fiduciaries” who must act in the best interest of their customers. Broker-dealers, on the other hand, are generally not deemed “fiduciaries” and are currently excluded from the definition of “investment adviser,” unless they charge separately for their investment advice. While broker-dealers are generally not considered “fiduciaries,” they do owe various duties to their customers, such as the duty to recommend “suitable” investments, obtain “best execution” when effecting trades and charge fair commissions or mark-ups for their services. However, these duties fall short of a fiduciary’s requirement to act in the best interests of the client and to avoid placing the interests of the fiduciary ahead of those of the client.
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