BILL NUMBER: S2872A

SPONSOR: HOYLMAN
 
TITLE OF BILL:  An act to amend the general obligations law, in
relation to mandating greater levels of disclosure by non-fiduciaries
that provide investment advice

 
PURPOSE:

The Investment Transparency Act (ITA) mandates new disclosures by insti-
tutions and individuals that provide investment advice, but who are not
required by law, professional standards, or their own policy to follow a
fiduciary standard of acting in their clients' best interests ("non-fi-
duciary investment advisors").

 
SUMMARY OF PROVISIONS:

Section 1 amends the general obligations law by adding a new article 6.

Section 6-101 determines that investment advisors currently not subject
to a fiduciary standard under existing state and federal laws or regu-
              

lations or by any applicable standards of professional conduct would be
subject to this bill. This includes those non-fiduciary investment advi-
sors who identify themselves to consumers as "brokers," "dealers,"
"investment advisors," "financial advisors," "financial planners,"
"financial consultants," "retirement planners," "retirement brokers,"
"retirement consultants," or by any other term that is suggestive of
investment, financial planning, 'ox retirement planning knowledge or
expertise.

Section 6-102 requires non-fiduciary investment advisors to make a plain
language disclosure to clients orally and in writing - at the outset of
the relationship that ensures that individual investors are aware of
potential conflict of interest. The disclosure shall read: "A non-fidu-
ciary investment advisor is not required by law to act solely in the
client's best interest. Federal law, state law, and standards of profes-
sional conduct do not apply a fiduciary standard to my investment recom-
mendations, although other standards may apply. You may ask any advisor
to explain to you the standards that apply to their investment recommen-
dations."

Section 6-103 provides for the enforcement of the act, including penal-
ties.

Section 2 establishes the effective date.

 
JUSTIFICATION:

The Investment Transparency Act is based on a report conducted by New
York City Comptroller Scott M. Stringer. Many New Yorkers hire financial
professionals to manage their retirement or other investments, but have
difficulty understanding the distinctions between the titles used by
such professionals, their duties, the services they offer, and the fees
they pay for those services. Most importantly, many individual investors
are do not know whether the financial professional they have hired is
required to act in their best interest (the "fiduciary standard").

Financial professionals who adhere to a fiduciary standard are obligated
to avoid conflicts of interest and fully disclose and manage, in the
client's favor, any conflicts. Consistent with this obligation, fiduci-
aries are required to provide prudent and objective analysis and advice,
including offering the client low-fee and low-commission investment
options.

However, existing laws, regulations, and professional standards at the
federal and state level only hold certain financial professionals to a
fiduciary standard, including Registered Investment Advisors (RIAs) that
are registered with the Securities and Exchange Commission (SEC) or a
state securities regular; retirement plan managers acting as fiduciaries
under the Employee Retirement Income Security Act (ERISA); Certified
Financial Planners (CFPs); Chartered Financial Analysts (CFAs); and
Certified Public Accountants (CPAs).

Other financial professionals, such as broker-dealers, follow a differ-
ent norm known as the suitability standard. The suitability standard
only requires that brokers guide their clients towards investments
"suitable" to the clients' stated investment objectives, means, and age.
So as long as an investment conforms to those broad guidelines, the
broker is under no legal obligation to choose the in vestment option
that promises the highest potential return for the lowest possible fee.
As a result, financial professionals that do not abide by the fiduciary
standard may encourage investments that carry higher transaction fees,
or direct investors' money into less advantageous "in house" invest-
ments.

Simply put, a suitability standard allows brokers to put their own
interest, or their firms' interest, before the customer's bottom line.

High fees, limited transparency, unacknowledged risks, and outright
conflicts of interest cost U.S. investors an estimated $8 to $17 billion
per year in retirement savings. This means that a conscientious retire-
ment saver who expects to retire in 30 years will lose at least 5 to 10
percent of retirement savings due to fees and underperformance compared
to more passively indexed funds, or the equivalent of approximately one
to three years' worth of withdrawals during retirement.

While individuals should be able to choose whatever investments suit
their particular needs - including, potentially, higher fee investments
- those decisions should only be made with all available information,
including whether and to what extent their broker will benefit form a
particular investment choice.

This bill is designed to provide greater transparency to New York State
consumers so that they are empowered to make more informed choices when
selected financial professionals and choosing investment vehicles.

 
LEGISLATIVE HISTORY:

2017-18: A.2464 (Dinowitz) - Third Reading Calendar
2015-16: A.6933 (Dinowitz) - Referred to Judiciary

 
FISCAL IMPLICATIONS:

None to the State.

 
EFFECTIVE DATE:
This act shall take effect on the first of January next succeeding the
date on which it shall have become law.