Legal Standards for Brokers - Transcript

Experienced Securities Lawyer Helping Investors Understand and Enforce Their Rights
Brokers and investment advisors are held to specific legal standards designed to protect investors from misconduct or breaches of fiduciary duties when applicable. These standards, rooted in securities laws, investment advisory regulations, and state Blue Sky laws, require brokers and advisors to act in their clients’ best interests. At Malecki Law, we help investors hold brokers accountable when they fail to meet these obligations, particularly in cases involving illiquid or complex investments.

Brokers are bound by Regulation Best Interest (Reg BI), a rule issued by the Securities and Exchange Commission (SEC) that governs how brokers must conduct themselves when recommending investments. Under Reg BI, brokers must ensure that their recommendations are:

• In the Investor’s Best Interest: The broker must prioritize the client’s financial goals and needs over their own potential compensation or benefits.
• Suitable for the Investor: Recommendations must align with the client’s financial objectives, risk tolerance, and level of investment knowledge. This is to not be confused with the former suitability standard, as Reg BI is a heightened standard.

These standards apply to all investment recommendations, including those involving annuities, private placements, or illiquid securities. Brokers are expected to thoroughly assess the risks and benefits of these products before recommending them to investors.

For example, placing a conservative investor into a high-risk, illiquid private placement without fully disclosing the risks could be against Reg BI and violate state securities laws. At Malecki Law, we work with clients to determine whether their broker adhered to these standards and, if not, pursue claims for damages.

Investment advisors operate under a higher standard of care compared to brokers. Under the Investment Advisers Act of 1940, advisors owe their clients a fiduciary duty, which includes:

• Acting in the Client’s Best Interests: Advisors must place their clients’ needs above their own and avoid conflicts of interest.
• Providing Full and Fair Disclosure: Advisors must fully disclose all material facts, including fees, risks, and potential conflicts.
• Ensuring Best Interest: Like brokers, advisors must ensure that recommended investments align with the client’s financial goals and risk tolerance.

When advisors breach their fiduciary duty—such as by recommending illiquid or speculative securities that are inappropriate for the client—they can be held liable for the resulting losses. These breaches may also involve failing to disclose conflicts of interest or prioritizing their own financial gain over the client’s best interests.

Illiquid investments, such as private placements, certain annuities, and proprietary securities, pose unique risks because they cannot be easily sold or converted to cash. These products are often marketed as high-return opportunities, but they come with significant downsides, including:

• Limited Access to Funds: Investors may be unable to access their money for years.
• High Fees: These products often carry significant upfront and ongoing fees.
• Market Volatility: Illiquid investments may be more vulnerable to market risks, particularly in uncertain economic conditions.

Brokers and advisors recommending these investments must be particularly cautious, as they require a higher level of scrutiny to determine best interest. They must clearly explain the risks and ensure that the investment aligns with the client’s financial goals. At Malecki Law, we represent investors who have been misled or placed into illiquid investments against their best interests, seeking to recover losses and hold brokers accountable.

In addition to Reg BI and fiduciary duty standards, securities cases often involve state Blue Sky laws, which regulate the offer and sale of securities at the state level. These laws provide an additional layer of investor protection, requiring brokers and advisors to register products, disclose risks, and comply with state-specific rules.

When brokers or advisors fail to meet these legal standards, they can be held liable for negligence, misrepresentation, or fraud. The same measures apply to securities cases involving complex products, annuities, private placements, or other high-risk investments.

If you’ve experienced financial losses due to recommendations made against your best interests or breaches of fiduciary duty, Malecki Law is here to help. Our attorneys have extensive experience handling securities cases, including those involving illiquid or complex investments. We work to hold brokers and advisors accountable, ensuring your rights are protected.

Call us today at 212-943-1233 to speak with a New York securities law attorney. You can also complete our confidential online contact form and we will promptly get back to you. We represent investors in New York, throughout the United States, and across the globe.

Transcript:

The same Securities laws investment advisory laws Blue Sky laws are used to determine whether or not the broker or advisor who recommended the investments in annuities private placements or some sort of liquid security was appropriate and so it’s going to go back to regulation best interest was it in your best interest was it suitable the subset of Regulation best interest under the Investment Advisors Act was the investment advisor acting as a fiduciary and not breaching their fiduciary duty by putting you into these illiquid Investments so it’s the same measure you would in any other Securities cases although I would argue that you have to be more careful when you’re recommending these types of Securities to an investor.