Broker Best Interest Regulations Fall Short

Written Disclosure Standards Pass the Buck to Investors

Investment account statements and paperwork can be voluminous and impenetrable. Precious few retail investors have the time, energy, or expertise to read through all of the materials they receive from their stock broker and brokerage firm. As a matter of practicality, the typical investors assumes the information included in those mailings and statements is correct. Often only in retrospect - after a catastrophe has occurred and a dispute has arisen - does anyone - including the retail investor, broker, or brokerage firm - look closely at all that paperwork. In fact, the job of sifting through all those pages of document often falls to third-parties who are experts in document-sifting. We call them lawyers.

Unfortunately for many retail investors, the brokerage industry and the regulations that govern it have relied on precisely that voluminous paperwork to shield themselves against responsibility for many offenses against clients. Not only in their defense will they point to complicated legal disclosures and paragraph after paragraph of fine print, but they have often been known to defend even outright fabrications hidden within the paperwork, simply because it's, well, in the paperwork. 

For example, in order to place you in high risk securities which bring him fat fees, on some forms your broker completely mischaracterizes you as an investor, saying you have plenty of money to lose to go with your enormous appetite for risk. Your broker then sends these forms to you in the mail for review. If you catch his deception, he merely apologizes or says he misunderstood you, and correct the error. If you don't catch him, well, according to FINRA, the securities industry regulatory body, since you received the paperwork in the mail, the information was effectively disclosed to you, and you effectively ratified it. It doesn't matter whether you read it or not. You have a duty to read all disclosures, information, correspondence, and statements coming from your brokerage firm. After all, they are YOUR investments, right?

Financial Literacy Cannot Be Assumed in Written Disclosure Doctrine

Well, while we understand that there is no way for firms to verify whether an investor has received and reviewed all correspondence that comes his or way, it is also unreasonable to expect investors not just to read but to understand all of the documents they are sent which are related to their accounts. Relying to heavily on written disclosures places an unfair burden on investors to police their own brokers. That burden should fall more squarely on the shoulders of sponsoring brokerages, who not only have the time and money but the financial expertise to recognize when brokers are getting up to no good.

In order to reform the system, investor advocacy groups have suggested the SEC enhance the standard to which brokerages and brokers are held with regard to investor best interests. Currently the standard is based on the necessity of matching investor and investment through a concept known as "suitability." Investor advocates like PIABA, however, want to raise that standard to the "best interest," which stipulates that brokers must act on behalf of their clients in a manner that always puts the best interest of the client first. Accordingly, they have made the following suggestions for reform the SEC proposal for more rigorous professional standards:

Proposed Reforms to SEC Broker Professional Standard Proposal

  • Prohibit certain incentive-based compensation plans, in particular sales contests that award brokers with high-end vacations and monetary prizes that can tempt advisors to place their own financial interests before those of their clients.
  • Bar incentives to sell any investment product ― including proprietary ones sold by a broker's own firm ― over any other product.
  • Require simplified disclosure of fees, charges and all other compensation.
  • Require brokers to engage in meaningful due diligence to prove they are providing advice that is in keeping with a client's real best interest.

Implementing these reforms would go a long way to correcting the imbalance between broker and investor, and reduce everyone's dependency on the deeply flawed doctrine of "written disclosure" as a way of shifting responsibility for supervision from the brokerage to the investor.

Pennsylvania & New Jersey Securities Litigation Firm

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If you or someone you know has been the victim of investment fraud or broker misconduct, contact our attorneys immediately for a free consultation toll-free at 215 462 3330 or by using our online contact form.

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