Shingle Theory - Explained
What is Shingle Theory?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is Shingle Theory?
The Shingle theory was developed in the 1930s by the Securities and Exchange Commission (SEC). This theory is used to describe a broker-dealer that maintains good ethics and high conducts when transacting securities. According to the idea, when a broker hangs a shingle, it means that such broker will be fair to customers when engaging in securities business. It also entails that the broker-dealer will make responsible and truthful decisions in securities business.
How Does Shingle Theory Work?
The Shingle theory maintains that brokers or security dealers maintain the best standards and conducts when dealing in security business. In line with the fiduciary duties of brokers and investment advisors, these professionals are expected to act in the best interest of their customers and also give honest and responsible suggestions relating to securities. Despite the presence of this fiduciary duty, there are many brokers and advisors that are unethical and always looking for ways to defraud clients. Such brokers and advisors are unqualified, even if they are shingle-hanging. In a bid to curb the excesses of these greedy brokers and advisors who look for ways to get money from clients in unsuspecting manners, the SEC and the Financial Industry Regulatory Authority (FINRA) have strengthened the guardrails of investors.
Permitting the Hanging of a Shingle
Despite the efforts of the SEC and FINRA to reduce the rate at which brokers and investors suck money out of unsuspecting clients, many unethical and unqualified brokers exist. When it comes to the securities business and other businesses involving money, many handlers, advisors or brokers tend to defraud clients in all sorts of manners. The Shingle theory was developed by the SEC to show that a broker will uphold integrity and act in the best interest of the client. When a broker hangs a shingle, it means he would give responsible suggestions to clients and act in their best interest. Before a broker can hang a shingle, he must undergo certain processes under the regulatory agencies. These include meeting requirements such as passing qualification exams, meeting background and educational qualifications.