Does Financial Regulation Equal Greater Investor Protection?

/ / Law Blog

The Dodd-Frank financial overhaul legislation was passed by Congress and signed into law by the President. What impact does it have for individual retail investors? The consensus among the experts is that it has no immediate benefit for retail investors but could result in significant changes down the road.

Office of the Investor Advocate and the Investor Advisory Committee

For example, the law establishes the Office of the Investor Advocate and the Investor Advisory Committee within the Securities and Exchange Commission (SEC). The mandate for these entities is to protect investor’s interests and assist investors but that will largely depend upon how they are funded and staffed. What voice will they have in decision and policy making at the SEC? What services will they provide to investors and how can they assist investors? We will have to watch and see how this unfolds.

Fiduciary Duty Standard of Care

Traditionally, stockbrokers do not owe their clients a fiduciary duty. A fiduciary duty is generally defined as a duty of loyalty, duty of care, a duty to avoid conflicts of interest and put the client’s interests first. Registered investment advisors have these fiduciary duties under federal law.

Stockbrokers generally have transactional duties such as duty to perform the customer’s orders promptly after receiving the customer’s approval. They also have the duty to recommend investments only after studying it, to inform the customer of the risks, and to not misrepresent any material facts to the transaction. Finally, they also have a duty to recommend investments that are suitable for the investor.

Under the new legislation, the SEC has the authority to impose the fiduciary duty standard on brokers. SEC must first study the issue and deliver a report to Congress. This will be a heavily lobbied report and review by Congress as brokers have historically fought hard to avoid the duties of being a fiduciary.

Also of note in the law is the power of the SEC to limit or prohibit mandatory predispute arbitration clauses in brokerage account agreements. Some advocates argue that mandatory arbitration is not fair for retail investors. They argue that biased industry arbitrators and unfair arbitration rules favor brokers and their firms. Conversely, the cost and efficiency of the arbitration process generally benefits retail investors over traditional state and federal courts. It will be interesting to whether the SEC will limit or give retail investors the choice to arbitrate or go to court.

Just because an account or an individual investment has decreased in value does not necessarily mean that a broker or financial adviser has acted inappropriately. At Crary Buchanan, we provide consultations concerning negligence arising from improper financial advice. If you have questions regarding your account or the duties owed by your broker, we invite you to call us to discuss your rights and remedies under the law.