Ethical Standards for Stockbrokers: Fiduciary or Suitability?
What are the ethical obligations of the sellers of financial products to their customers? Stockbrokers in the U.S. have a legal and ethical requirement to recommend only “suitable” investments to their customers. This is a fairly weak standard. Currently, there are proposals to raise the standard to a fiduciary one in which the recommendations would have to be in the best interests of the clients. Brokers sell solutions to financial problems. Similar to an auto mechanic or a doctor, the product often consists of both the professional advice and its implementation. There are numerous conflicts of interest between brokerage firms and their customers in that the products that pay the highest commissions may not be the best ones for the customers. The societal perspective adds complications, however. Society depends on modern financial markets to raise capital for productive enterprises and to spread risk. Issuers of financial products need distribution channels for their products just like the producers of any other products. Commissions create powerful incentives for the distribution channels, but at the same time produce conflicts of interest—a type of ethical pollution. Just as our society tolerates some pollution as a byproduct of other useful activities, it may be useful to tolerate some of these financial conflicts of interest. The nature of the relationship should govern the ethical standard. Those selling advice, regardless of how they label themselves, should adhere to a best-interest fiduciary standard. More limited relationships should be limited to the mandate involved in the relationship.
KeywordsFinancial services Suitability Fiduciary Stockbrokers Ethical standards
- American Law Institute. (1977). Second restatement of the law (Torts) (Vol. 3). St. Paul, MN: American Law Institute.Google Scholar
- Blankfein, L. (2010). Testimony of Lloyd Blankfein, CEO of Goldman Sachs, April 27, 2010 before Senate Governmental Affairs Subcommittee on Investigations. Retrieved February 6, 2012 from http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_senate_hearings&docid=f:57322.pdf.
- Boatright, J. R. (1999). Ethics in finance. Wiley.Google Scholar
- CFA Institute. (2005). Code of ethics and standards of professional conduct. Retrieved May 17, 2012 from http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2005.n8.4568.
- Facciolo, F. J. (2005). A Broker’s duty of best execution in the nineteenth and early twentieth centuries. Pace Law Review, 26, 155–182.Google Scholar
- Financial Industry Regulatory Authority (FINRA). (2004). News release: Goldman Sachs, Deutsche Bank, Miller Tabak Roberts, Citigroup Global Markets to pay total $20 million for Corporate High Yield Bond Trade Violations, July 28, 2004. Retrieved May 17, 2012 from http://www.finra.org/Newsroom/NewsReleases/2004/p010892.
- Financial Industry Regulatory Authority (FINRA). (2007). NASD manual, Rule 2310. Recommendations to customers (suitability). Retrieved May 17, 2012 from http://finra.complinet.com/finra/display/display.html?rbid=1189&record_id=1159000499&element_id=1159000500&highlight=suitability#r1159000499.
- Financial Industry Regulatory Authority (FINRA). (2011). Sanction guidelines. Retrieved May 17, 2012 from http://www.finra.org/web/groups/industry/@ip/@enf/@sg/documents/industry/p011038.pdf.
- Gedicks, F. M. (2005). Suitability claims and purchases of unrecommended securities: An agency theory of broker dealer liability. Arizona State Law Journal, 35, 535–588.Google Scholar
- Goldin, O. (2006). Ciceronian business ethics. Studies in the History of Ethics. Retrieved May 17, 2012 from http://www.historyofethics.org/112006/GoldinCiceronianBusEthics.pdf.
- Hazen, T. Lee. (2010). Are existing stock broker standards sufficient?—Principles, rules and fiduciary duties. Columbia Business Law Review, 10, 710–762.Google Scholar
- Heath, E. (2010). Fairness in financial markets. In J. R. Boatright (Ed.), Finance ethics: Critical issues in theory and practice (Robert W. Kolb Series), Chapter 9 (pp. 163–178). New York: Wiley.Google Scholar
- Infogroup/ORC. (2010). U.S. investors & the fiduciary standard: A national opinion survey. Retrieved September 30, 2010 from http://www.cfp.net/downloads/US_Investors_Opinion_Survey_2010-09-16.pdf.
- Libin, N. C., & Wrona, J. S. (2001). The securities industry and the internet: A suitable match? Columbia Business Law Review 601–682.Google Scholar
- Nichols, F. H. (1976). The broker’s duty to his customer under evolving federal fiduciary and suitability standards. Buffalo Law Review, 26, 435–455.Google Scholar
- Nider, J. (1966). On the contracts of merchants, (De Contractibus Mercatorum) (C. H. Reeves, Trans.). Norman, OK: University of Oklahoma Press.Google Scholar
- Richardson, B. J. (2007). Do the fiduciary duties of pension funds 922 hinder socially responsible investment? Banking and Finance 923 Law Review, 22, 145–201.Google Scholar
- Sandberg, J. (2011). Socially responsible investment and fiduciary duty: Putting the freshfields report into perspective. Journal of Business Ethics, 101(143), 162.Google Scholar
- Securities and Exchange Commission. (1963). Report of Special Study of Securities Markets of the Securities and Exchange Commission. U.S. Government Printing Office, Washington, D.C. Retrieved July 4, 2012 from http://www.sechistorical.org/museum/papers/1960/page-2.php.
- Securities and Exchange Commission. (2005a). Certain broker-dealers deemed not to be investment advisers. Release nos. 34-50980; IA-2340; file no. S7-25-99, 70 FR20424.Google Scholar
- Securities and Exchange Commission. (2005b). Regulation NMS, Securities Exchange Act release no. 51808 (June 9, 2005), 70 FR 37496.Google Scholar
- Securities and Exchange Commission. (2007). Temporary rule regarding principal trades with certain advisory clients. Release no. IA-2653; file no. S7-23-07, 72FR55022. Retrieved May 17, 2012 from http://www.sec.gov/rules/final/2007/ia-2653.pdf.
- United States House of Representatives. (2009). HR 4173: Wall Street Reform and Consumer Protection Act of 2009. Retrieved February 11, 2012 from http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173eh/pdf/BILLS-111hr4173eh.pdf.
- Weiss, C. G. (1997). A review of the historic foundations of broker-dealer liability for breach of fiduciary duty. Journal of Corporate Law, 23, 65–119.Google Scholar