FINRA: “Fiduciary” Standard Architect?

Securities and Derivative Litigation   |   March 31, 2014
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FINRA is encouraging broker-dealers (BDs) to act in their customers’ best interests, although the "suitability" standard applicable to BDs does not expressly require it.

For example, in 2012, FINRA implemented an expanded suitability rule and released Regulatory Notice 12-25, elaborating on its position that BDs should be "acting in [customers’] best interests." Similarly, FINRA’s Report on Conflicts of Interest last October urged BDs to implement strong conflict management frameworks, including a code of conduct based on the "best interests" standard.

These and other efforts to emphasize and define BDs’ conduct necessarily promote fiduciary-like duties of care and loyalty.

FINRA appeared to reinforce this notion when, last December, it announced the creation of an 11-member Investor Issues Committee (IIC) comprised of persons not currently associated with FINRA. Indeed, the IIC, which will advise FINRA on rulemaking and policy initiatives that impact investors, includes former SEC Chairman Elisse Walter. Ms. Walter has historically advocated a "harmonization" of the duties of BDs and investment advisers (IAs) such that BDs would have a more explicit fiduciary duty to their customers. The IIC also includes two members of the SEC’s Investor Advisory Committee, which, too, promotes investor interests and has advocated a fiduciary standard for BDs that would explicitly require them to act in their customers’ best interests.

It is unclear how closely the fiduciary-like standard that FINRA seems to be crafting for BDs will resemble the fiduciary standard already applicable to IAs. In any event, FINRA’s efforts may have some influence on the SEC’s ongoing deliberations about harmonizing such standards. FINRA may also be bolstering its credentials to advance its continuing ambition to be a self-regulatory organization for IAs.

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