July 21, 2010
Dodd-Frank Forum: Where's the Fiduciary Duty for Brokers?
Posted by Christine Hurt

I mentioned before that one big idea of Dodd-Frank was almost Goldman Sachs.  However, over time, the Goldman-specific provisions were watered down or taken out completely.  Section 913 seems like a strange compromise on a Goldman-specific idea:  imposing fiduciary duties on brokers. 

This argument has come up lately a few times with regard to Goldman.  First, Goldman testified in front of Congress in April, and was asked about this question.  Erik blogged about it and gave a round-up of links to writers and bloggers on the topic of fiduciary duties for securities brokers.  Here's another post from Erik on the SEC suit against Goldman (now settled) where Goldman's obvious defense was that it owed no fiduciary duties to its brokerage clients.

So, Dodd-Frank does away with this big distinction between brokers and investment advisors, right?  Um, not really.  Section 913 almost does.  What does it do?  Section 913 requires the SEC to study the effectiveness of the standard of care for brokers who give investment advice to retail customers.  Study this.  Then, the SEC must submit a report 6 months from (I guess) today.  Then, the SEC can engage in any rulemaking necessary to address the standard of care.  To make this easier, Dodd-Frank goes ahead and amends 15 U.S.C. 78o(k) to authorize the SEC to promulgate rules to establish that the standard of care for brokers giving personalized investment advice to retail customers is the same as that for investment advisers under the Investment Adviser Act.  Does this mean that broker fiduciary duty is a foregone conclusion?  I'm not sure.  Rulemaking, as others have pointed out here, is different from legislating.  Broker fiduciary duty might go the way of attorney "up the ladder" reporting after Sarbanes-Oxley. 

And, it will only apply to retail customers, who are defined as natural persons.  So, Goldman is off the hook.  Even if this duty had existed before the Abacus deal, Goldman would not have owed a fiduciary duty to its non-retail client.

UPDATE:  Our own Glom Master Larry Ribstein also testified at the hearing mentioned above and tells me that the SEC will follow through and promulgate rules as per Dodd-Frank, creating an identical duty for brokers along the lines of investment advisers.  So, this may be a done deal.  Larry also reminds me that this debate was going on before the Goldman Abacus suit, which may answer the retail customer question.  Here is Larry's response to Erik's April post on broker fiduciary duties following the hearing.  Once this is a done deal, there will be some great opportunities for research.  In my experience, those who would manage retail customers personal rollover IRAs seem to charge more if you choose a fiduciary duty relationship, so there may be great unintended consequences here.

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