Broker Liability

The new administration's financial regulatory proposal has big changes that dominate the headlines. It is hard not to focus on the proposal to give power of the Fed to declare large firms "too big to fail" and subject to heavy inspection and oversight.  The potential for politicial extortion under such a system is obvious. [Recall actor Fred Thompson's description of a "Japanese inspection" for imported lettuce.]  Wall Mart, get ready.

But in the proposal are small changes that are also huge in their spheres of influence.  Consider the change that would make all brokers "fiduciaries" to clients.  Lawyers will benefit as law suits against brokers will abound whenever a broker loses a large client's money.  Broker lawyers will test the limits of waiver, producing rafts of documents that clients must sign on any trade ("I have personally researched....")  And brokers will put clients in funds of funds, mutual funds and ETFs, passing the buck to other intermediaries that are not burdened by the heightened standard.  It will change the business entirely.