Public investors looking to grow their savings, pay for their children’s education, or plan for retirement often decide to put money in the stock market. Most investors are not experienced in financial markets, so to help manage their investments to achieve their financial goals they often go to a broker or to an Investment Adviser (IA).

On June 5 the United States Securities and Exchange Commission (SEC) adopted the new “Regulation Best Interest” rule, which affects the duty investment brokers owe to their clients. In the past decade there has been intense discussion on the level of protection the public should have when seeking investment guidance from the securities industry.

Both brokers and IAs buy and sell securities for their clients and provide investment advice, but brokers receive commissions based on the trades they make, whereas an IA usually provides more individually tailored advice for a set management fee. Investors expect the advice they receive from their broker or IA will be in their best interest. However, this is not always the case.

Under Federal and most States’ laws, IAs act as fiduciaries of their clients’ accounts. This is an “affirmative duty of utmost good faith, and full and fair disclosure of all material facts” to clients and requires an IA to put the client’s interests first: ahead of the IA’s own interests or those of other clients.

Brokers, however, are not fiduciaries to their clients. Brokers are only required to believe that the recommendations they give are “suitable” for clients. This means a broker could recommend investments to a client for the purpose of providing that broker a larger commission, as long as they believe it is a suitable investment. This would be a violation of the duty of loyalty for an IA.

To make things even more confusing for investors, most IAs (88% as of 2010) are dually registered as both IAs and brokers. This means, depending on the type of account or transaction, your IA could be acting as merely a broker, with the lower duties of care and loyalty, and you may never even realize it.

Under the Obama Administration, the SEC called for a uniform fiduciary standard for all brokers and IAs when providing personalized investment advice to retail customers. Wall Street brokerage firms fought hard against these rules, as putting their clients’ interests above all else would cut into their profits. But the rules were issued by the Department of Labor in 2016. In 2018, the rules were struck down by the 5th Circuit Court of Appeals. Since that time, the SEC (chaired by Jay Clayton, who formerly represented or advised major Wall Street firms including Goldman Sachs and Bear Sterns) and the Department of Labor have been working on new rules, which were released June 5.

The new rules, supported by Wall Street, include the so-called “Regulation Best Interest” (Reg BI). Reg BI, at best, falls short of imposing fiduciary duties on brokers, leaving hundreds of billions of dollars of U.S. investor money vulnerable to broker self-dealing and undisclosed conflicts of interest. The Public Investors Arbitration Bar Association and the Consumer Federation of America have slammed the rules as merely codifying the suitability standard, but labeling it “best interest,” which will further mislead investors.

In a comment letter to the SEC in February 2019, the North American Securities Administrators Association, an organization of securities regulators devoted to investor protection, warned that “acting in the client’s best interest” could be accomplished under the rule with mere disclosure of conflicts, which is often in a multi-page legal document that most investors don’t fully read or comprehend.

Worse yet, a statement issued by one of the SEC’s own commissioners following the rule’s adoption reveals that language stating that the law “requires an investment adviser to put its client’s interest first” was removed from the original proposal, which weakens the heightened fiduciary responsibilities of IAs.

Time will tell what effect Regulation Best Interest has on U.S. investors. It’s hard to imagine that it could be better than the full, across-the-board, fiduciary standard for all brokers and IAs implemented during the Obama administration, and most investor advocacy groups are fearful of the consequences. More now than ever, it is important for Main Street investors to look after their own interests when planning for their financial future. If you think that your broker or advisor has lined their pockets at the expense of your family’s future, seek legal advice.

If you need more information on this subject, contact James Eubank, a lawyer in our firm’s Consumer Fraud & Commercial Litigation Section.

This story appears in the July issue of The Jere Beasley Report. For more like it, or to subscribe, visit the Report online.

Jere Beasley, Beasley Allen Attorney
Jere Beasley

Jere Beasley, the founding member of Beasley Allen Law Firm, has practiced law as an advocate for victims of wrongdoing since 1962. He was the lead Beasley Allen attorney in the record $11.9 billion award against ExxonMobil Corp. on behalf of the state of Alabama.


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