Feb 16, 2010

1934 Congress passes the Securities Exchange Act, creating the Securities and Exchange Commission and giving it authority to oversee brokerage firms. Brokers, which the act defines as those conducting securities transactions for others, must generally be registered with the S.E.C., though the commission has delegated much of the rule-making to a self-regulatory organization, now called the Financial Industry Regulatory Authority. The authority, known as Finra, requires brokers to adhere to a suitability rule, which says that a broker must make recommendations that are suitable for customers based on their financial situation, needs and goals.

1940 Congress passes the Investment Advisers Act, which defines an investment adviser as someone compensated for advising others on investing in securities. While the act itself does not use the word fiduciary - meaning that advisers need to put their clients' interests first - the United States Supreme Court has ruled that advisers do have a fiduciary duty under the act. A broker is not subject to the act as long as his advice is "solely incidental to the conduct of his business as a broker" and he does not receive "special compensation" for advice. The law required brokers only to make "suitable" recommendations, not necessarily the best recommendation for a client.

Click to go to the New York Times website and view the entire article.