What is Shingle Theory?
How does a broker-dealer behave? Does he maintain good ethics and conduct every time he transacts securities? We have a theory called “Shingle Theory.” It is all about the questions we mentioned. This theory involves broker-dealer standards of professional conduct and shows information about the financial market in the US. Shingle’s theory says that as soon as broker-dealers start advertising their services to the public, they should follow the best financial services industry practices. What are these practices that we refer to? They include disclosing all information about the securities they sell to their customers. The most critical information they can give is the price and the particular compensation that the broker will receive if the security gets sold.
How did it start?
When we say shingle, what comes to your mind? We may think about a building material that we most likely use for roofs or a small signboard outside an office. The latter is where the idea came from. Are you familiar with the phrase “Hang out one’s shingle?” Traditional retail businesses say this when they open for business. So, customers can expect to be treated fairly, and the store will follow all the significant laws and regulations. We can also apply this to broker-dealer firms. They can hang out their shingle in the financial services marketplace, and we can expect that they will always be ethical and transparent.
The SEC and the Shingle Theory
In 1939, SEC encountered a legal case where a broker-dealer became unethical. He overcharged customers and did not tell the customers about the market prices of the securities he sold. The judge took the side of the SEC, and the broker-dealer lost his license to operate. The following court cases somehow replicated that decision. In fact, the shingle theory is still applicable today.
Broker-dealers should charge clients a price that seems reasonable even if we compare it to the general market price of the securities. Also, the customers should be aware of these general market prices.
The Fiduciary duty and the Shingle theory
What is a fiduciary? It is someone who works for another person or people. Also, he should always think about his client’s best interest before anyone else’s, even before his. He must preserve trust and good faith. A fiduciary is legally and ethically needs to act in the other person’s best interest. Does this concern shingle theory? In a way, it does because it says that broker-dealers should act as if they have a fiduciary duty to their customer. This includes all the situations where they are not even the client’s fiduciaries. Fiduciary financial professionals should always think about customers’ best interests, so they should always give responsible and truthful suggestions regarding securities.
Let’s recap.
The shingle theory involves the broker-dealers’ standard professional conduct. This legal doctrine requires broker-dealers to follow the industry’s best practices, especially those related to the pricing and disclosing their products on sale. This theory still influences the financial services sector and is still mentioned in litigation
