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The financial reform legislation first announced by President Obama in June of 2009 and approved by the House last Fall is expected to finally make its way to the Senate floor within the week. However, to secure passage of the bill by both parties, the portion of the financial reform which sought to establish a fiduciary duty for securities brokers toward their customers is not likely to make the cut. In its place, the bill will probably call for a study on the costs and benefits of any new standards. For the average, unsophisticated investor who simply can’t make heads or tails of an increasingly complex securities market, this outcome is really just too bad.
Under the current system, broker-dealers contend that they are only required to make “suitable” investment recommendations and the “fiduciary duty standard” is limited to financial advisors. What this translates to, however, is that brokers are not required to act in the customer’s best interest. The suitability rule is actually an antiquated rule. To hold brokers merely to that standard does not accurately reflect the business model in the securities industry today nor does it take into account the relationship of trust and confidence that often exists between the customer and broker. At the beginning of the relationship, broker-dealers promote themselves as being trusted advisors. However, when the relationship sours and litigation ensues, these broker-dealers defend the cases by stating that they owe no fiduciary duties to the customer. Moreover, they wrongfully defend themselves by arguing that their only duty is to execute trades and make “suitable” recommendations. This has been, and, for the foreseeable future, always will be the defense raised by brokerage firms in almost every case. Had the financial reform legislation passed in its original form, brokers would no longer be allowed to use the suitability rule as a shield to defend themselves. The deletion of the “fiduciary standard” provision is truly unfortunate.