Image credit: “The Daily Boom,” John S. Pughe, cartoon, from Puck, vol. 511 (May 14, 1902): “The promoter waters the stock, the newspaper booms it (for a consideration) and the silly public buys it — after which the water is squeezed out.” Library of Congress
By Jason Zweig
March 24, 2015 6:37 p.m. ET
New York City Comptroller Scott Stringer on Wednesday will call for stockbrokers and financial advisers operating in New York state to be required to disclose whether they are obligated to put their clients’ interests ahead of their own.
Mr. Stringer will urge legislators in Albany to enact a rule requiring brokers to inform actual or prospective clients that the brokers might not always put clients’ interests first. He said in an interview Tuesday that he expects such a bill to be introduced in the state legislature “very soon” and that it will have “many co-sponsors.”
The city comptroller is among the first state or local politicians to wade into the regulatory controversy over the duties that stockbrokers and financial advisers owe to their clients. Industry analysts say others could follow, particularly if federal regulators are slow to draft rules on how these duties should be implemented.
By law, investment advisers—mutual-fund managers and many financial planners—have a “fiduciary duty” to put their clients’ interests first and seek to avoid conflicts of interest. Stockbrokers, insurance agents and other securities salespeople need only ensure that investments are “suitable” for clients.
Spurred by the Dodd-Frank financial-regulation law of 2010 and President Barack Obama, both the Securities and Exchange Commission and the Labor Department are working on rules that would establish a fiduciary duty for brokers. But the timetable for the new rules is uncertain.
Mary Jo White, chairman of the SEC, told the U.S. House of Representative’s Financial Services Committee on Tuesday that she expects the regulator to develop fiduciary rules “in the very near term” and that the SEC has provided technical assistance as the Labor Department develops its proposed rule changes.
“This is a critical issue for everyone who invests their money,” Mr. Stringer said Tuesday. “There’s so much at stake that we can’t wait for Washington to act, and the states must move to the forefront of action on this issue.”
Mr. Stringer’s proposal would require a broker who isn’t subject to fiduciary duty to tell current and prospective clients, both orally and in writing, that “I am not a fiduciary.” In addition, the broker would need to disclose that “I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.”
The New York City comptroller has no jurisdiction over stockbrokers nor a vote in the state legislature. Under U.S. law, state or municipal regulators are generally precluded from superseding federal rules on how brokers and financial advisers should sell investments to the public. However, local officials can still regulate some aspects of disclosure and of business practice.
Given those limitations, Mr. Stringer’s initiative is “a creative way to use what authority they do have to enhance the protections for investors,” said Barbara Roper, director of investor protection for the Consumer Federation of America, whom the comptroller’s office consulted while developing the proposal.
Ms. Roper said she would like to see the initiative catch on elsewhere. “I would hope that other jurisdictions will look at this and will think it’s a good idea,” she said.
Some in the brokerage industry, on the other hand, don’t think Mr. Stringer’s proposal is a good idea.
“You can’t just say, ‘Fiduciary good, broker bad,’ ” said Ira Hammerman, general counsel of the Securities Industry and Financial Markets Association, a Wall Street trade group. “That is a misguided approach.” He pointed out that brokerage firms are inspected far more frequently by regulators than financial advisers are and that it can be easier for investors to recover losses from brokers than from advisers.
Mr. Stringer said his proposal “will obviously not be easy for a lot of people to swallow, but we believe it is critical for protecting people’s life savings.”
Source: The Wall Street Journal