Proposal to impose fiduciary standard on broker-advisers heads to Hill

Draft legislation that would give the Securities and Exchange Commission the authority to require brokers who give investment advice to act as fiduciaries was sent to Capitol Hill today by the Treasury Department. The draft, which includes numerous investor protections, is the second legislative proposal sent by the Obama administration to Congress to implement the financial services regulatory reform plan it announced in June. “The legislation outlines steps to establish consistent standards for all those who provide investment advice about securities, would improve the timing and quality of disclosures about investments, and would require greater accountability from securities professionals,” the Treasury Department said in a statement. Under current law, broker-dealers are required to make suitable recommendations for customers, while investment advisers must adhere to a more stringent fiduciary standard, which requires that they act in the best interest of their customers. In addition to requiring all advisers to abide by fiduciary standards, the SEC would have the power to “examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary, but not in the investor’s best interest,” according to a fact sheet put out by the Treasury Department. The legislation also would give the SEC authority to prohibit mandatory arbitration clauses in broker-dealer, investment adviser and municipal securities dealer agreements. The SEC would be given authority to require that a concise summary prospectus and cost disclosures be delivered to mutual fund investors before sales are completed. Additionally, individuals barred from being investment advisers because of serious misconduct would not be able to apply to become broker-dealers. Also, a permanent investor advisory committee would be established under the proposal. Further, the SEC could establish a fund to pay whistleblowers for information that leads to enforcement actions resulting in significant financial awards under the proposal. It is not known when the legislation will be introduced in Congress or acted on, said Steve Adamske, spokesman for the House Financial Services Committee.