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Advisers and Broker-Dealers: Is Fiduciary Duty the Answer?

Consumer groups have long called for the harmonization of regulation between investment advisers and broker-dealers.  The latest round of financial regulatory reform legislation currently in conference committee also calls for the SEC to study imposing the same fiduciary standard of care on broker-dealers as is currently required of investment advisers.  Barbara Black of the University of Cincinnati College of Law, however, thinks that the focus on fiduciary duties for both sets of investment professionals may be misplaced, and a standard of professionalism is more appropriate in this context.  

In a draft paper, "Fiduciary Duty, Professionalism and Investment Advice," Black lays out as an alternative to fiduciary duty four arguments about the regulation of investment professionals: 

  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.

Black's paper seeks to illuminate the contentious debate between investment advisers and broker-dealers about how regulatory harmonization should be implemented, providing an alternative standard by which it can be achieved.  

The full text of Black's March 28, 2010 draft can be found here.