Investors deserve highest standard of care



Published:

As investors struggle to regain their financial footing under the weight of the ongoing economic crisis, Washington is awash in proposals to rebuild the nation’s financial regulations and usher in a new era of responsibility in financial services. While this vital policy discussion plays out, investors would be wise to watch for attempts to water down any rules currently in place to protect them. A case in point is the recent push by the securities industry to convince lawmakers to provide a “universal standard of care” for all investors based on fair dealing. Who could argue with that? But, as with many innocent-sounding proposals that come out of Washington, there are clear and present dangers beneath the surface. There is regulatory concern that the universal-care standard would provide very little protection for investors who really need regulation that requires the financial services industry to act in the best interests of its clients. Investment service professionals not only offer different services, they also are subject to various federal and state regulatory requirements and have different legal obligations, or standards of care, to their customers. Over the last two decades, the lines between those who provide investment advice and those who sell investment products have blurred, and most investors do not understand the legal obligations of each service. Today, the average Main Street investor is confronted with a vast menu of different financial products and an equally long list of professionals to help them meet their financial goals. But not all financial services professionals have the investor’s needs at heart. There is concern that brokers may be pressured to suggest risky investments or to unload so-called toxic assets. For example, auction-rate securities were aggressively marketed to investors in our state and nationally by the brokerage community as being safe and liquid as cash, when brokerage firms knew the ARS market was in trouble and were scrambling to reduce their inventory of such products. The obligation to always place the customer’s interest first is known in legal terms as the “fiduciary duty” — the highest standard of care recognized under law. Those acting as a fiduciary also must provide up-front disclosures about their qualifications, how they are paid, their disciplinary record and any possible conflicts of interest. Applying a fiduciary duty to all financial professionals would lessen the incentive to value the bottom line over customer satisfaction and would put the interests of all investors squarely where they need to be - first and foremost. Investment advisers now must act as fiduciaries, but stock brokers generally are not required to meet this same legal standard of care when working with customers. Instead, brokers consider their customer’s age, tolerance for risk and other factors to determine the financial products that are suitable to meet their financial needs. Brokers also do not have to provide the same up-front disclosures required of investment advisers. The Madoff Ponzi scheme and other high-profile breaches of trust between financial professionals and their clients serve as stark reminders of the need for strong standards of conduct in the financial services industry. As Congress considers how to modernize financial services regulation and better protect investors, it makes sense to extend fiduciary duty to all financial professionals who give investment advice about securities — stockbrokers and investment advisers alike. For all financial professionals, the interests of the client must come first at all times. Investors deserve no less.

Mark Connolly is director of the New Hampshire Bureau of Securities Regulation. Edit ModuleShow Tags

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