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CFA Applauds Plan to Strengthen Key Investor Protections

Reform of brokerage practices advances

July 13, 2009

"If enacted by Congress and effectively implemented by the Securities and Exchange Commission, this legislation will provide long-sought and much needed protections to investors as they interact with the brokers, financial planners, and investment advisers they rely on to help them achieve retirement security and save for important financial goals," said CFA Director of Investor Protection Barbara Roper.

Under the legislation, brokers who provide investment advice would have to act in their clients' best interests, just as investment advisers are required to do.

"Over the years, full service brokers have been allowed to portray themselves to the public as 'financial advisers,' offer extensive investment planning services, and market their services based on the advice offered, all without having to act in their clients' best interests, which is the true hallmark of an advisory relationship," said Roper. "This legislation should put an end to that disparity and to the investor confusion that has resulted."

The legislation also directs the Securities and Exchange Commission to study securities industry compensation practices and change those procedures that encourage investment professionals to act in ways that are not in their clients' best interests.

"The securities industry is rife with such conflicts of interest," Roper said. "By pairing the fiduciary duty with compensation reform, the administration makes clear that it is committed to protecting investors, even when doing so challenges the industry's traditional ways of doing business. This is a change in regulatory approach that is long overdue."

Among its other provisions, the legislation would authorize the SEC to ban or limit the use of pre-dispute binding arbitration clauses in broker and adviser contracts, conduct consumer testing of disclosures and other regulatory proposals, and require pre-sale disclosure to investors in mutual funds.

"Although we strongly support all of these provisions, we are disappointed that the legislation's pre-sale disclosure requirement applies only to mutual funds," Roper said. "As Congress moves forward on this legislative package, we hope they will at the very least direct the SEC to examine the feasibility of providing comparable pre-sale disclosures for all products and services recommended. While mutual funds are a logical place to start, this reform should not end there."

Roper said the administration has sent Congress what she calls "an impressive legislative package that would dramatically improve the protections average investors receive when dealing with investment professionals."

She urged Congress to move quickly to adopt the legislation.

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