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Greim compares Fiduciary and Suitability Standards for investment professionals, comments on high-frequency trading on ETF Store Show

Recently on the ETF Store Radio Show, Graves Garrett Attorney Edward Greim explained and contrasted the different legal duties that certain types of investment professionals owe to their clients. On the show, which aired May 6, 2014, on 1510 AM in Kansas City and is now available by podcast, Greim explained that broker dealers owe clients a duty to select suitable investments under FINRA Rule 2111. In contrast, registered investment advisers owe clients a fiduciary duty of care and loyalty.

“The key thing is that the broker has to have a reasonable basis to believe that the recommendation that the broker makes is suitable based on a customer’s investment profile,” Greim said.

A wide range of investments can satisfy the broker-dealer’s suitability requirement, according to Greim, and within that range, investments can vary in terms of risk, volatility and broker compensation.

Fiduciary duty is a more stringent duty than suitability, Greim continued, which means that registered investment advisers may be unable to recommend the wider range of investments that would pass legal muster under a broker-dealer’s more relaxed duty to recommend “suitable” investments. There are two aspects of the investment adviser’s fiduciary duty: the duty of care and the duty of loyalty. The duty of care is more stringent that a duty to recommend suitable investments because it requires, for example, that the adviser monitor the investment even after the purchase.

The duty of loyalty focuses on gains the professional may make as a result of his or her work for the client.  As Greim explained, the duty of loyalty requires answering questions like: “Will the firm make money on this after the customer purchases the investment?” and “Does the firm have a relationship with the fund?”

Although the fiduciary standard is a “step above” the suitability standard, Greim believes there is a lot of investor confusion today because the two standards have converged over time.  Greim noted that a rulemaking by the Securities and Exchange Commission, required by the Dodd-Frank Act, is expected to be complete by year-end and may well alter the legal standards applicable to broker-dealers.

Finally, Greim commented on recent media attention focused on High-Frequency Trading (HFT). Greim explained that although some have claimed these advancements are tantamount to “frontrunning,” the trades simply cannot be characterized in this way as a legal matter.  

Graves Garrett, LLC, represents businesses and executives nationwide in commercial litigation, white collar criminal defense litigation, and all levels of legal compliance. The firm offers comprehensive and creative solutions to complex legal problems along with unparalleled client service and a true commitment to obtaining the best result possible.


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