Nearly all investors, particularly those who seek investment advice, must rely on the services of brokerage firms, who, in turn, solicit customers by advertising the quality of their advice and their attention to their customers' needs. Because of this, investors are entitled to expect that their brokers will perform these services competently and carefully.
Yet many investors are victims of negligent treatment by the brokers. Moreover, a major deficiency in the federal regulatory system, as currently interpreted by the federal courts, is that investors have no federal remedy to compensate them for injuries caused by incompetent and careless brokers. This is the law, despite the fact that Congress, the Supreme Court, the SEC, and the self-regulatory organizations all agree about the centrality of broker competence and care in the federal regulatory system. Unfortunately, then, their lofty language is largely rhetoric.
This paper argues that Congress should adopt federal standards of competence and care for brokers and provide investors with a damages remedy for violation of these standards. I first explain why state law does not provide adequate protection for investors. I then set forth my proposal for federal standards. I next consider, as an alternative to congressional enactment, promulgation of these standards by the SEC and explore possible ways that investors could use them as the basis of a damages claim. I then assess the policy objections made by the Supreme Court and other federal courts to expanding private damages remedies for investors and find them inapplicable or not convincing in the context of the customer-broker relationship, where virtually all of customers' claims are resolved through SRO arbitration. Finally, I explain why adoption of legal standards of competence and care is important as SRO arbitration moves away from its origins as an equitable forum toward a quasi-judicial system where investors' claims may need a firmer grounding in legal principles.
Black, Barbara, "Transforming Rhetoric into Reality: A Federal Remedy for Negligent Brokerage Advice" (2006). Faculty Articles and Other Publications. 53.