Relates to mandating greater levels of disclosure by non-fiduciaries that provide investment advice; requires signed acknowledgement of disclosure informing clients that the advisor owes no fiduciary duty.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A2464A
SPONSOR: Dinowitz (MS) 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 OR GENERAL IDEA OF BILL:
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, or 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: "I am not a
fiduciary. Therefore, 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."
Section 6-103 provides for the enforcement of the act, including penal-
ties.
Section 2 sets the effective date.
DIFFERENCE BETWEEN ORIGINAL AND AMENDED VERSION (IF APPLICABLE):
The amended version makes a change to 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 investment option that
promises the highest potential return for the lowest possible fee. As a
result, financial professionals that do not abide by the fiduciary stan-
dard may encourage investments that carry higher transaction fees, or
direct investors' money into less advantageous "in house" investments.
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 O.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.
PRIOR LEGISLATIVE HISTORY:
2015-16: A.6933 - Referred to Judiciary
2017: A.2464 - Reported to Codes
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
None to the State.
EFFECTIVE DATE:
This act shall take effect on the first of January next succeeding the
date on which is shall have become a law.
STATE OF NEW YORK
________________________________________________________________________
2464--A
2017-2018 Regular Sessions
IN ASSEMBLY
January 20, 2017
___________
Introduced by M. of A. DINOWITZ, GOTTFRIED, ORTIZ, STECK, PICHARDO,
MOSLEY, BLAKE, SEAWRIGHT, BICHOTTE, COOK, COLTON, GALEF, BUCHWALD --
Multi-Sponsored by -- M. of A. DAVILA, GLICK, SIMON, TITONE -- read
once and referred to the Committee on Judiciary -- reported and
referred to the Committee on Codes -- recommitted to the Committee on
Codes in accordance with Assembly Rule 3, sec. 2 -- committee
discharged, bill amended, ordered reprinted as amended and recommitted
to said committee
AN ACT to amend the general obligations law, in relation to mandating
greater levels of disclosure by non-fiduciaries that provide invest-
ment advice
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. The general obligations law is amended by adding a new
2 article 6 to read as follows:
3 ARTICLE 6
4 INVESTMENT TRANSPARENCY ACT
5 Section 6-101. Application.
6 6-102. Required disclosure.
7 6-103. Enforcement.
8 § 6-101. Application. The provisions of this article are applicable to
9 investment advisors currently not subject to a fiduciary standard under
10 existing state and federal laws or regulations or by any applicable
11 standards of professional conduct. "Non-fiduciary investment advisors"
12 shall include, but not be limited to individuals and institutions that
13 identify themselves to consumers as "brokers," "dealers," "investment
14 advisors," "financial advisors," "financial planners," "financial
15 consultants," "retirement planners," "retirement brokers," "retirement
16 consultants," or by any other term that is suggestive of investment,
17 financial planning, or retirement planning knowledge or expertise.
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD03774-02-8
A. 2464--A 2
1 § 6-102. Required disclosure. 1. Non-fiduciary investment advisors
2 shall make a plain language disclosure to clients orally and in writing
3 at the outset of the relationship that ensures that individual investors
4 are aware of potential conflicts of interest. Such required disclosure
5 shall state the following: "I am not a fiduciary. Therefore, I am not
6 required to act in your best interests, and am allowed to recommend
7 investments that may earn higher fees for me or my firm, even if those
8 investments may not have the best combination of fees, risks, and
9 expected returns for you." The non-fiduciary investment advisor shall
10 provide a copy of the disclosure form to their client.
11 2. A signed acknowledgement by the client that this plain language
12 disclosure was provided must be maintained by the non-fiduciary invest-
13 ment advisor alongside any written client agreement.
14 3. Any investment brochures, advertising materials, or other related
15 printed information provided to clients, or any subsequent oral invest-
16 ment advice to them, must also include such disclosure set forth in a
17 clear and conspicuous manner. The non-fiduciary investment advisor shall
18 provide a copy of the disclosure form to their client.
19 4. Investment advisors that are subject to the fiduciary duty under
20 law or applicable standards of professional conduct with respect to
21 certain types of investment advice but not others, must disclose in
22 plain language the extent to which the fiduciary duty does and does not
23 apply.
24 § 6-103. Enforcement. Whenever the attorney general finds that there
25 has been a violation of this article, he or she may proceed as provided
26 in subdivision twelve of section sixty-three of the executive law. Civil
27 penalties up to five thousand dollars may be imposed for each violation
28 of this article.
29 § 2. This act shall take effect on the first of January next succeed-
30 ing the date on which it shall have become a law.
