Thursday, March 26, 2015

NYC Comptroller Urges Fiduciary Transparency Law

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

New York City Comptroller Scott M. Stringer announced his plans to ask state legislators to enact a law that would help consumers to better grasp the standard of care their financial advisers must live up to. The debate over whether federal regulators should do the same has been ongoing since Congress authorized the SEC to adopt a uniform fiduciary standard under a provision in the Dodd-Frank Act. But the issue persists because advisers subject to the Investment Advisers Act are treated as fiduciaries, while broker-dealers are held to the lower suitability standard.

Stringer’s proposal is essentially a disclosure requirement. According to a press release, the proposed law would require any financial adviser who abides by the suitability standard to explicitly state to their customers that they are not a fiduciary and can still recommend investment options that are not in the customer’s best interest.

Stringer emphasized the harms possible under the current dual system of advisers who are fiduciaries and those who are not. “Hard-working New Yorkers should not be penalized by a system that doesn’t adequately address potential conflicts of interests and financial mismanagement.” He also cited a report by his office that details changes in the marketplace that can result in consumer confusion over the roles played by different types of financial advisers.

But Stringer noted a few signs of change, including recent efforts by the Department of Labor to define “fiduciary” under the Employee Retirement Income Security Act of 1974. He also noted some movement by SEC Chair Mary Jo White toward a uniform fiduciary standard.

White said in her testimony to the House Financial Services Committee yesterday that the SEC had provided “technical assistance” to the DOL regarding the definition of fiduciary. She also suggested that she may put the SEC on a path similar to the one the DOL has taken.

“After significant study and consideration, I believe that broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors,” said White. But she also noted some barriers to implementing a uniform standard, including how to define the standard, what guidance to give about permitted and banned practices, and how to enforce a new standard.