Broker-dealers, investment firms and financial advisors are trusted by consumers nationwide to protect their hard-earned investments. However, the standard of care these professionals owe to their clients varies greatly, depending on whether you’re dealing with a financial advisor or a broker-dealer.

Financial advisors have fiduciary duties to their clients. This means financial advisors owe their clients the highest level of care possible under the law; they are required to act in good faith at all times and are required to put their client’s interests above their own, while taking no commission profit from their financial recommendations.

However, broker-dealers do not owe fiduciary duties to their clients.  Most broker-dealers are paid on a commission basis for each recommendation they give to clients. As such, broker-dealers have a monetary interest in the financial advice they give to consumers and are under a lesser obligation to protect their clients’ interests.

It is important for consumers to understand the regulations governing broker-dealer conduct. Broker misconduct or securities fraud can include a variety of improper actions taken by a broker including, but not limited to:

  • Unsuitable Investments: An investment is “unsuitable” when an investment advisor places a client in a high-risk investment to maximize the advisor’s own commissions, when the client is not in the position to afford loss. For example, an investment adviser can be held accountable for placing an elderly client in a high-risk, speculative investments.
  • Churning: Churning is when a broker over-trades within a client’s account or portfolio to generate broker commissions. Every if the account shows a positive return, a broker can still be held accountable for improper churning.
  • Unauthorized Trading: Unauthorized trading happens when a broker buys or sells securities without a client’s authorization or permission.
  • Misrepresentation or Failure to Disclose Information: A broker has a duty to fully explain the risks and benefits of an investment. Failure to disclose material information about the investment or misrepresentations about the investment violate the broker’s legal obligations.


Broker-Dealer Obligations

The Securities and Exchange Commission recently re-defined the obligations a broker-dealer owes to clients when making financial recommendations.

On June 5, 2019, the SEC reformed their investment advice rules. “Regulation Best Interest” imposes specific obligations on broker-dealers providing consumer investment advice.

Regulation Best Interest places a number of obligations on broker-dealers, specifically:

  • Disclosure Obligation
    • Brokers are required to disclose in writing all material facts relating to the scope and terms of their relationship with the consumer.
  • Care Obligation
    • In making a recommendation to a customer, Brokers must exercise reasonable diligence, care and skill to understand the risks, rewards, and costs of any recommendation made to a consumer.
    • Brokers must have a reasonable basis to believe that the recommendation they are making to the consumer is in the best interest of the consumer and does not place the interest of the broker-dealer above the interests of the consumer.
    • Brokers must have a reasonable basis to believe that transaction they recommend is not excessive.
  • Conflict of Interest Obligation
    • Brokers must establish, maintain and enforce written policies and procedures designed to identify and disclose all conflicts of interest.
    • Brokers are required to either disclose all material facts relating to their conflicts of interest or eliminate them.
    • This obligation also requires the Broker not prioritize their own interests, or their firm’s interests, over the interests of the customer.
  • Compliance Obligation
    • Brokers must maintain procedures reasonably designed to maintain compliance with Regulation Best Interest.

For consumers, this means that broker-dealers must satisfy each of these obligations to ensure they act in the “best interest” of their clients. Regulation Best Interest becomes effective June 30, 2020.

If you believe you or your loved ones have been a victim of Broker Misconduct, please contact Miller Law Group for a free consultation, or call 919-348-4361.