During a series of recent public addresses, U.S. Securities and Exchange Commission Chair Mary Jo White confirmed that the SEC is hard at work fashioning new regulations to establish a “uniform fiduciary standard” for all securities brokers.1 This SEC action comes in the wake of the Department of Labor’s ongoing rulemaking process to broaden its own definition of those who are considered fiduciaries in relation to ERISA plans and IRA assets.2 There have been reams written in the industry regarding the benefits and costs of this looming shift to a uniform fiduciary standard for brokers and advisers, primarily focused on the burdens of compliance, the impact on investors, and the sweeping changes that may be triggered in terms of compensation structures and sale of proprietary products.3 But in criminal actions, there may also be a profound impact on the analysis of fraud claims against securities brokers. Presently, in New York and numerous other jurisdictions, absent special circumstances, a broker is generally not considered a fiduciary of a customer unless the broker exercises discretion over the customer’s account. That absence of a fiduciary relationship, in turn, limits the extent to which a broker’s alleged “omissions” can form the basis for a securities fraud prosecution. As discussed below, if the DOL and/or the SEC decide to classify brokers as “fiduciaries,” prosecutors and regulators will likely seek to rely on that designation to argue that any allegedly “material omission” constitutes a regulatory and even criminal offense, subject to all of the severe accompanying penalties. Since the scope of allegedly material omissions is limited only by a prosecutor’s inventiveness, and the willingness of a disgruntled customer to confirm the importance of the supposed omission, the consequences—intended or not—are well worth considering.
The Proposed Fiduciary Rules.
