2013 will see changes to the duty of care owed by those who provide financial or investment advice or provide financial products to consumers. It appears that multiple regulators will use the expectation of the consumer in considering who owes a duty of care and the extent of the duty of care owed in providing financial or investment advice to consumers.
Phyllis Borzi, Assistant Secretary for the Department of Labor’s (DOL’s) Employee Benefits Security Administration, announced that in the first part of 2013, the DOL will issue a reproposal of its rule defining who is a fiduciary. The reproposal will follow the DOL’s 2010 attempt to expand the definition of an ERISA fiduciary, which was withdrawn after it was met with considerable criticism. Assistant Secretary Borzi asserted that “people who hold themselves out as experts are accountable” and must “exercise the standard of care that consumers think they are getting and deserve to get.” The advice offered must be “unbiased” and it “has to be directed [to the consumer] and [the consumer’s] best interest.”
In its Fiscal Year 2012 Agency Financial Report, the Securities and Exchange Commission (the SEC) reported that it expects to move forward with recommendations from an SEC staff report to consider a uniform fiduciary standard of conduct for investment advisers and broker-dealers when providing personalized investment advice to retail investors. This recommendation was based upon the finding that “retail customers do not understand and are confused by … the standards of care applicable to investment advisers and broker-dealers when providing personalized investment advice and recommendations about securities.” The report states that investors “have a reasonable expectation that the advice that they are receiving is in their best interest.”
Under Section 1031(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the DFA), the Consumer Financial Protection Bureau (the CFPB) has the authority to declare an act or practice as abusive if the act or practice takes unreasonable advantage of “the reasonable reliance by the consumer on a covered person to act in the interest of the consumer.”
The CFPB was granted jurisdiction over non-securities licensed persons providing financial advisory services to consumers on individual financial matters or relating to certain proprietary financial products or services. The DFA left it to the CFPB to further define what is abusive, and several commentators have asserted that the CFPB will impose a heightened duty on the non-securities licensed persons providing financial advisory services.