Legislative Agenda

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Principle Three

Promote a Fair and Transparent Marketplace for Retail Investors

  • Uniform Fiduciary Standard for Financial Professionals
  • Information Disparities and Conflicts-of-Interest that Harm Ordinary Investors
  • Equitable Recourse & Mandatory Arbitration Contracts
  • Standardized Disclosure of Broker-Dealer Fees

State securities administrators are committed to fostering a fair and transparent marketplace. Transparency makes markets more efficient and reduces opportunities for manipulation and fraud. Similarly, informed investors increase overall market confidence, which encourages ordinary retail investor participation. State securities regulators are, however, increasingly concerned that advances in technology and other factors have made it possible for sophisticated market participants—hedge funds, high-frequency traders, proprietary dark pools, and others—to identify and exploit informational asymmetries in order to maximize profits, often to the detriment of retail investors.

NASAA hopes to work with the 114th Congress to bolster and expand fairness and transparency in many important areas, including improved investor dispute resolution, access to market information, and disclosure of investment fees charged by broker-dealers.

Uniform Fiduciary Standard for Financial Professionals

Section 913 of the Dodd-Frank Act directed the SEC to study differences in the standards of care required of broker-dealers and investment advisers who provide personalized investment advice. The study found that while investment advisers are subject to a strict “fiduciary duty” standard, broker-dealers are subject to more lenient standards governing their conduct. The establishment of a uniform fiduciary duty standard governing the conduct of broker-dealers and their agents is crucial for the protection of investors. A fiduciary standard for broker-dealers will guarantee that all financial professionals providing investment advice to retail investors will act in the best interests of their clients and, in turn, enhance investor confidence in the securities markets. NASAA urges the 114th Congress to exercise its oversight authority to encourage the SEC to conduct rulemaking to subject broker-dealers to the same fiduciary duty standard currently applicable to investment advisors when offering personalized investment advice to retail investors.

Information Disparities and Conflicts-of-Interest that Harm Ordinary Investors

Investor confidence in the U.S. financial markets is based on the perception of transparency, accountability and a level playing field. From revelations of collusive rigging of benchmark interest rates, to allegations that financial institutions provide undisclosed, unfair advantages to an elite class of high-frequency traders, recent events have revealed serious issues undermining the confidence in our financial system.

We encourage the 114th Congress to investigate these issues, including equity market structure, in order to identify conflicts of interest that operate to the detriment of ordinary retail investors. This inquiry could include oversight of the SEC’s “holistic review” of U.S. equity market structure and the creation and implementation of its proposed consolidated audit trail. It could cover potential conflicts of interest for broker-dealers who own and operate dark pools, and who profit from volume in such pools. Another area ripe for investigation is conflicts of interest inherent in the “maker taker” system and payment for order flow arrangements. Finally, Congress might investigate conflicts of interest in for-profit exchanges that are simultaneously seeking to increase shareholder earnings while acting as self-regulatory organizations, responsible for enforcing compliance with their rules and the federal securities laws.

Equitable Recourse & Mandatory Arbitration Contracts

Every year thousands of investors file complaints against their stockbrokers. However, almost every brokerage firm, and an increasing number of investment adviser firms, include mandatory pre-dispute arbitration clauses in their customer account agreements. These clauses require investors to submit all disputes that they may have with the brokerage firm to arbitration. If cases are not settled, the only alternative is arbitration administered by the Financial Industry Regulatory Authority (FINRA).

State securities regulators believe that investor confidence in fair and equitable recourse is critical to the health of our securities markets and long-term investments by retail investors. Although Congress gave the SEC rulemaking authority to act in this area, in the more than four years since the Dodd-Frank Act was signed into law the SEC has not conducted rulemaking or begun to examine the impact of mandatory pre-dispute arbitration clauses on the public and investors. NASAA urges the SEC to exercise its authority, but in the absence of such action, supports Congressional action to codify Section 921 of the Dodd-Frank Act by prohibiting the use of mandatory pre-dispute arbitration clauses. At a minimum, we urge Congress to exercise its oversight authority and investigatory responsibility to require the SEC to gather quantitative and qualitative data that would establish the analytical foundation for future rulemaking.

Standardized Disclosure of Broker-Dealer Fees

Transparency is a cornerstone of a properly functioning market because it allows market participants to quickly and easily compare prices, products and firms. NASAA recently issued a report examining fee disclosure practices in the brokerage industry. The study uncovered disparities in how broker-dealers disclose the maintenance and service fees they charge their customers. While broker-dealers may be complying with the technical requirements governing fee disclosures, NASAA’s report concluded that the disclosures lose their effectiveness when hidden in small print, embedded in lengthy account opening documents, or varied in terminology that does not define the service provided.
NASAA has convened a working group consisting of state securities regulators and representatives of FINRA, the Securities Industry and Financial Markets Association (SIFMA), the Financial Services Institute (FSI), and representatives of broker-dealer firms to develop improved broker-dealer fee disclosure. NASAA similarly encourages Congress to request that the Government Accountability Office study the impact of fee disclosure practices on investors and consumers.