Working for Justice

SEC Proposes Regulation to Enhance Investor Protection

In an effort to enhance investor protections, the Securities and Exchange Commission (SEC) is proposing a new rule – Regulation Best Interest – that may come as a surprise to some investors. The SEC’s proposed rule requires your stockbroker to act in your best interest at the time he or she recommends an investment to you, something that the average investor believed to be the case to begin with. But it’s not the case. Prevailing law does not obligate stockbrokers to act in your best interest when making recommendations. The recommendations need only be suitable for your particular situation. This allows stockbrokers to recommend investments that pay them or their firms extra revenue regardless of whether there are cheaper or better alternatives. Investors are then stuck with expensive, poorly-performing investments in their portfolios.

In 2008, Congress, through the Dodd-Frank Act, directed the SEC to consider rulemaking to establish a fiduciary duty standard for stockbrokers. Then, as now, significant confusion abounded about the relationship between a stockbroker and a customer. Stockbrokers are given impressive titles – financial advisor, wealth manager, portfolio consultant – that impart a sense of credibility and expertise to the average investor. Then, expensive advertising campaigns convey the message to the general public that your stockbroker will deal with you with the utmost good faith and integrity. All of this is designed to put investors at ease. In reality, these fancy titles require little or no training or expertise and thus have no real meaning. All too often, the greed and self-interest of some stockbrokers and the companies behind them replace good faith and integrity. As a result, unsuspecting investors become vulnerable to investor fraud and abuse.

Although the SEC’s proposed rule does not establish a fiduciary duty standard for stockbrokers, it makes an effort to address garden-variety stockbroker fraud. Regulation Best Interest requires your stockbroker to act with reasonable diligence, care, skill and prudence when dealing with you. Under the proposed Rule a stockbroker needs to understand the risk of their investment recommendations and have a reasonable basis to believe their recommendations are in your best interest. Rather than flatly prohibiting the stockbroker from having interests adverse to yours, Regulation Best Interest requires the stockbroker to disclose those conflicts to you. If Regulation Best Interest is adopted, the myth that stockbrokers are supposed to act in your best interest will become reality. This would be an encouraging and positive step towards protecting the average investor’s interests.

The Regulation Best Interest proposal has been a long-time in the making, and adoption is not a certainty. The proposed rule must now endure a comment period in which interested parties can either support or object to the proposed rule. As we witnessed with the Department of Labor’s Fiduciary Duty Rule, we can expect significant resistance from certain segments of the brokerage industry. The industry is not about to surrender terms and conditions that have favored them for so many years. Until the rule is adopted, investors must remain vigilant. Demand answers to your questions about fees and investment performance, and refuse to do business with anyone whose answers are evasive. This is information you have a right to know.

And it’s simple to check your stockbroker’s disciplinary history. Go to FINRA’s “BrokerCheck” and then type in the name of your stockbroker. A detailed history of the stockbroker will appear. A stockbroker with a history of arbitration awards, customer complaints, or regulatory discipline is a glaring “red flag.” If you have questions about your investor rights, please contact the Financial Services lawyers at Sanford Heisler Sharp LLP.

Charles Field

Charles Field

Charles H. Field is a partner in the San Diego office of Sanford Heisler Sharp. As Co-Chair of the Firm’s Financial Services practice, Mr. Field leverages his decades of practice focused on commercial transactions and regulation to recover investments that have been mishandled or lost. Learn More

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