Document Type

Article

Publication Date

2010

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Securities and Exchange Commission authority to address two issues especially important to retail investors. First, section 913 requires the SEC to conduct a six-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and specifically authorizes the SEC to establish a fiduciary duty for broker dealers. Second, section 921 grants the SEC authority to prohibit the use of predispute arbitration agreements that would require investors to arbitrate future disputes arising under the federal securities laws and regulations or the rules of a self-regulatory organization. What has been overlooked in the debate over retail investor protection is the interconnectedness of these two provisions. Debate over retail investor
protection after Dodd-Frank must consider these two issues together in order to achieve the goal of better retail investor protection. I make three principal arguments. First, I argue that broker-dealers and investment advisers should be held to standards of care and competence based on professionalism, rather than fiduciary duty. Second, I propose, for adoption by the SEC, federal professional standards of care and competence for broker-dealers and investment advisers. Third, I argue that the SEC's adoption of standards of care and competence will not create any additional federal remedies for investors because it is unlikely that the United States Supreme Court will imply a private damages remedy for their breach. If the SEC prohibits mandatory securities arbitration of claims based on federal securities law and SEC and SRO rules, the ability of retail investors, particularly those with small claims, to recover damages for careless and incompetent investment advice may be substantially
reduced.

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