Insurance Alert Update: Fiduciary Standards for Brokers 'Crowded' Out?

July 31, 2013

In a report this week in Investment News (here), the SEC has indicated that it will work as "quickly as [it] can" to propose a rule to raise investment advice standards for brokers. But that initiative may have to wait until the SEC has adopted rules for other "high profile" issues, like "crowd funding". The article suggests that the broker investment advice standard issue has been moved off of the "front burner" because it is controversial and "may split the five-member commission." The article reports that the SEC is now conducting a cost-benefit analysis of a potential rule. The comment period for a data request ended July 5.

If the change is adopted by the SEC, brokers and insurers can expect a dramatically altered claims environment.

As noted in our ICI Conference Recap & Analysis (here), the issue of the standard of care applicable to brokers is undergoing intense scrutiny world-wide. Several countries focus on adoption of some form of standard or duty that investment advisors and/or brokers selling mutual funds would owe to investors. In the US, the Dodd-Frank Act mandated a review by the SEC of the obligations of advisors and brokers to investors. The Act suggested a rule that would impose a uniform fiduciary standard for retail investment advice given by brokers. In its report released on January 21, 2011, the SEC concluded that it was too complicated for investors to parse through the relative standards and duties of investment advisors and brokers and know what applied to which and when - especially where it is common in the industry for the same person to operate as both broker and advisor. A proposed heightened standard for brokers would be similar to that of advisors: “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” This standard of care would be imposed on broker dealers when “providing personalized investment advice about securities to retail customers.”

Many advisors/brokers are sensitive to the possible shift to a more stringent standard - considering and preparing for additional training and education for registered representatives. The possible change in the standard leaves brokers open to increased litigation and other risk exposures. So if the Commission puts issue back on the front burner, and adopts the heightened standard, advisors, brokers, and underwriters will need to assess whether current coverage limits are sufficient to address that altered claims environment.

For more information on this issue or Bowditch & Dewey's insurance litigation practice, please contact Mary-Pat Cormier at or 617-757-6527.