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The SEC Must Follow Puerto Rico’s Investor Protection Lead

April 4, 2014 Blog

Believe it or not, the tiny U.S. island territory of Puerto Rico has a higher legal standard for financial advisors than the SEC requires on the mainland.

Puerto Rico has a law that imposes a “fiduciary duty” for financial advisors to follow. That means advisers must act in the client’s best interest.

Unfortunately, this novel approach does not currently exist in the brokerage business in United States.

In 2009, the Dodd Frank Act gave the SEC the legal authority to impose fiduciary duty rules governing all financial advisors, such as the major Wall Street firms who deal with retail customers.

Remarkably, despite the passage five years ago, the SEC has not yet acted on implementing this law. As you can imagine, the securities industry has been waging a war against the fiduciary standard. The brokerage industry is scared to death of the legal liabilities that could come with this much tougher, higher standard of stewardship and truly putting the client first.

In recent public speeches, Securities and Exchange Commission Chairman Mary Jo White, has raised the issue but has not taken action. In February, White stated that the fiduciary duty rule was a “very high priority” of the SEC.

On March 21, 2014, White, in a speech to the Consumer Federation of America, stated that the SEC was currently looking at the “appropriate role and legal duty for investment advisors and broker-dealers, especially when they are both giving advice on securities to retail investors”.

“We will intensify our consideration of the question of the role and duties of investment advisers and broker-dealers, with the goal of enhancing investor protection,” Ms. White said at the SEC Speaks conference in Washington sponsored by the Practicing Law Institute, according to a report in industry newspaper InvestmentNews by Mark Schoeff.

“In a meeting with reporters after her remarks, Ms. White said that she wants the five SEC commissioners to come to a conclusion on whether to implement a uniform fiduciary standard for investment advice and to decide whether to harmonize regulations that govern investment advisers and brokers,” according to the report.

Schoeff summed up the dilemma facing the securities industry. The fiduciary standard is simply a more rigorous point of sale guideline than what is currently in place. “The Dodd-Frank financial reform law gave the SEC the authority to promulgate a regulation that would require that brokers who provide retail investment advice must always act in the best interests of a client — the standard that investment advisers already meet,” he reported. “Brokers are held to a suitability standard when they sell investment products.”

In other words, stock brokers, and their firms, would have to do rigorous analysis of a product such as a mutual fund, nontraded REIT or variable annuity before selling to clients. Those brokers would have to compare products against their competitors, dig into the potential for returns and analyze the costs over the lifetime of the investment. Right now, brokers simply pull whatever they have out of their inventory to sell to clients, kind of like a shoe salesman. The fiduciary standard would eliminate those shoddy sales practices.

Now is the time for the SEC to step up to the plate and require the hordes of financial advisors, including the herds at UBS and Merrill Lynch, to adhere to the standards that the tiny island of Puerto Rico has long required for their financial advisors. Investors on the mainland U.S. should have the same protection.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit