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Massive Federal Reforms Fail to Prevent Stockbroker Fraud

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Kansas City, MOThe recent passage of a congressional bill that undertakes a massive overhaul of the financial regulatory system, there will likely be further incidents of stockbroker fraud due to fact that the new law does not require stockbrokers to act as fiduciaries on behalf of their clients. Writing in the Kansas City Star on 8/16/10, lawyer and arbirtation expert Diane Nygaard lamented the failure of the Dodd-Frank Wall Street Reform and Consumer Protection Act to really put the rubber to the road.

As much as the 2,300-page reform bill achieves, it fails big-time in one fundamental area: it does not require stockbrokers to put the best interests of their financial clients ahead of their own.

Nygaard, past national president of the Public Investors Arbitration Bar Association, makes the point that there is nothing in regulatory authority that prevents stockbrokers from serving or even calling themselves financial advisers—when in fact, what they are doing is promoting and vending house funds and other products that provide more advantages in the end to the stock broker and his or her employer than to the client.

The Dodd-Frank Wall Street Reform and Consumer Protection Act bestows upon the Security and Exchange Commission (SEC) the right and authority to impose fiduciary duty on a broker who dispenses financial advice, Nygaard writes, but falls short of actually requiring the SEC to do so.

The fallout can and has resulted in stockbroker fraud when brokers fail to disclose material information to their clients, or urge their clients to invest in products that carry high fees or that may be a poor choice for the client's portfolio.

Nygaard notes that Missouri state law imposes fiduciary duty on stockbrokers who dispense financial advice, putting them in the same league as attorneys, CPAs, registered investment advisers and trust officers who provide financial advice to their clients.

With millions of Americans seeing their nest eggs decimated as a result of fraudulent practices and the recent financial crisis—the breadth of which has not been seen since the Great Depression—stockbrokers need to be held accountable as fiduciaries for their clients, putting their customer's best interest ahead of their own.

"Down the road, Congress must change the law to require that all financial advisers, whatever they call themselves, give impartial, honest advice," Nygaard writes.

Until that happens, stockbroker investment fraud will remain a fact of life for thousands of Americans who can ill afford losses at this time.


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