DEFINITION of Shingle Theory

Shingle theory is a suitability doctrine first introduced by the Securities and Exchange Commission (SEC) in the 1930s. The idea is that a broker who "hangs a shingle" will deal with his or her customers fairly and responsibly when making suggestions regarding securities.

BREAKING DOWN Shingle Theory

How quaint and cute the shingle theory is (or was). While most investment advisors today are honest and act in the best interests of their clients in accordance with tenets of fiduciary duty, there are many unqualified, unethical and greedy shingle-hanging advisors or brokers who want to suck the money out of unsuspecting customers. Over the years the SEC and other regulators like FINRA (Financial Industry Regulatory Authority) have fortified guardrails for investors so that brokers cannot so easily bilk their clients out of their hard-earned funds. Still, it happens, as some cockroaches will be able to scurry away with crumbs and chunks of lucre because there are too many of them and too few resources to crush them out of existence.

Permitting the Hanging of a Shingle

Because human beings have demonstrated that this world is far more Hobbesian than Rousseauian, particularly when it comes to money, a number of vetting steps must be performed by regulatory agencies before someone is able to hang a shingle to advertise his services as a broker or financial advisor. A prospective broker or other securities-related professional must pass qualifying exams and background checks to receive the right to hang a shingle. Whether an old-style shingle, a fancy sign, or logo emblazoned on steel and glass, the privilege of continuing a visual display for business must be maintained, with regular oversight by the regulatory agencies, which will also bring enforcement actions to brokers who step out of line.