Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 5, 2010

Black on Fiduciary Duty, Professionalism and Investment Advice

I recently posted on SSRN my latest paper, Fiduciary Duty, Professionalism and Investment Advice.  Because it is a work-in-progress, I welcome comments and criticisms.  Here is the abstract:

Although broker-dealers and investment advisers provide virtually identical services, they are subject to different regulatory schemes and standards. These sharp legal distinctions that do not comport with reality have led to investor confusion and concern about the adequacy of investor protection. The Obama administration’s Financial Regulatory Reform includes proposals that would “establish a fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisers and broker-dealers.” In addition, the Obama proposal calls for the SEC to study the use of predispute arbitration arguments in securities arbitration and to invalidate them if it would be in the best interests of investors. As of March 25, 2010 Congress has not enacted financial reform legislation. Although the bill passed by the House and the bill approved by the Senate Banking Committee reflect different approaches, any legislation that Congress ultimately enacts is likely to address both these issues in some fashion, probably by calling on the SEC to study them further.

Despite their consensus on the general concept of harmonized regulation, the broker-dealer and investment adviser industry groups are bitterly divided over how to accomplish this. In addition, the broker-dealer industry supports mandatory securities arbitration, while other groups call for its abolition. This paper seeks both to shed some light and remove some heat from these contentious debates. I make four arguments: 1. The fiduciary duty standard is not a useful standard for regulating the conduct of broker-dealers or investment advisers; the standard should be based on professionalism. 2. There are established standards of care and competence that should be applicable to both broker-dealers and investment advisers. 3. Without an explicit federal remedy for negligence, investors do not have adequate protection. 4. If Congress directs or encourages the SEC to invalidate predispute arbitration agreements, small investors are likely to be worse off.

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