SEC Provides Brokerage Firms with New Loophole to Avoid Breach of Duty to Investors

As discussed in earlier postings, after a court overturned the “Merrill Rule,” which exempted brokerage firms from duties of Investment Advisors Act of 1940, brokerage firms say they will cease “fee based” accounts rather than assume duties to clients mandated my that legislation. However, as predicted, regulators and legislators will instead come to their rescue.

The Securities and Exchange Commission fought hard to exempt brokerage frims from the advisors act, but lost, and is now busily helping Wall Street with new enforcement loop holes. For example, the SEC has now decided to permit non-discretionary advisory accounts to be exempt from certain principal trading restrictions. A principal trade is an order a broker-dealer executes for its own account rather than one it simply executes in the market for its client.

Under the new rule, brokerage firms must first provide written notice and obtain blanket consent from these clients. They are then exempt from breach of fiduciary duty for self-serving actions as they profit on sales of securities to these clients sold from the firms’ inventories.

The firms must notify investors in writing that the firm may engage in principal trading and describe possible conflicts of interest, as well as the way it will address those problems. (“Just a note to tell you that, although you are paying me to look out for you, I am instead selling you stuff for more than I paid for it. Have a nice day.”)

SIFMA, the securities trade group, applauded the rule. “This decision provides important flexibility to these consumers and delivers increased consumer choice within the constraints set by the court,” said Marc Lackritz, president and CEO of SIFMA.

Thanks to Marc and the rest of the securities industry for persuading their puppets at the SEC to provide investors with such “flexibility” and “choice.” What would they do without you?

Shepherd Smith and Edwards represents investors nationwide in claims against members of the securities industry. We have represented investors in more than 1,000 securities cases. To learn whether we are able to assist you with a claim contact us to arrange a free consultation with one of our attorneys.