FINRA Rules Could Create a De Facto ‘Uniform’ Fiduciary Standard

July 14, 2011Articles Westlaw News & Insight Securities Blog
In January 2011, the SEC, under the mandate dictated by the Dodd-Frank Act, announced its recommendation that there be a uniform fiduciary duty standard applied to both broker-dealers and registered representatives. The Securities and Exchange Commission has stated that it would propose that uniform fiduciary duty standard by July 2011. That promulgation date has since been delayed again. If the recent comments of Barney Frank, one of the namesakes of Dodd-Frank, questioning whether broker-dealers should be subject to the same fiduciary duty as are registered investments advisers, are an indication, it is unlikely there will be any "uniform" fiduciary duty in the near term.

Nevertheless, the Financial Industry Regulatory Authority has, since the passage of Dodd-Frank, taken steps toward further regulating broker-dealers and is likely to promulgate new rules that may make a uniform duty unnecessary because, through rulemaking, FINRA may impose additional obligations on member firms that would otherwise be consistent with a uniform fiduciary duty standard.

For example, on July 1, 2011, FINRA Rule 4530 came into effect. This rule represents a combination of FINRA Rule 3070 and NYSE Rule 351, requiring member firms to self-report a number of categories of information. The most aggressive and controversial component of this rule is the requirement that a member firm self-report within thirty days after it concluded or reasonably should have concluded that an associated person or the firm violated any securities, insurance, commodities, financial or investment-related laws, rules, regulations or standards of conduct. The interpretive comments to Rule 4530 provide that a firm should report where the conduct has widespread, or potential widespread, ramifications that stem from the material failure of the firm's systems, policies or practices involving numerous clients, multiple errors or significant dollar amounts.

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