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The initiative is based on a clear set of principles for investors and securities firms as well as specific recommendations on critical issues facing the industry. At SIA’s annual meeting, Thornburgh outlined recommendations for five of those issues, including mutual-fund disclosure, investor rights, and soft dollars, and said SIA would release other recommendations on an ongoing basis.
Beginning this month, SIA will begin an outreach campaign to educate securities firms and investors about Commitment to Clarity and the benefits it can bring to the industry. The campaign will include online initiatives, outreach to regulators and Congress, and proactive work with industry leaders to anticipate developments on important issues.
“Through Commitment to Clarity, we now have a strong framework for continued efforts to align the interests of the securities industry with the interests of investors,” Thornburgh said. “Last year, I set a goal for the industry to recommit ourselves to the best interests of our clients and I believe this initiative will accomplish that goal.”
The clarity initiative outlined by Thornburgh today consists of four major principles, each of which is critical to the fair and efficient operation of the markets:
- Clarity of Responsibility – Securities firms must set and abide by high standards that ensure risks and conflicts are disclosed, compliance standards are enforced, and investor suitability is maintained.
- Clarity of Costs – All investors have the right to know the costs of financial products and services in advance in a form that they can easily understand, and these costs should be considered in the context of services provided.
- Clarity of Performance – Investors should be able to easily understand any comparisons or benchmarks used by securities firms, and, when possible, they should be standardized.
- Clarity Through Understanding – Securities firms should work to help investors, public officials, and industry professionals fully understand the nature of the securities business and financial markets.
“We want to go beyond basic principles and develop specific recommendations on important issues,” Thornburgh said. “We are outlining recommendations for five issues today and over the next year we will develop recommendations for other topics critical to our industry.”
The Investors’ Bill of Rights
The Investors’ Bill of Rights outlines the rights and responsibilities that should guide investors and advisers when making investment decisions. Investors’ rights include:
- The right to high quality services from the securities firm of their choice.
- Full and clear reporting.
- Responsible investment advice when advice is offered.
- Clear procedures for ensuring the prompt, fair resolution of any problems or complaints.
- Planning their investment goals carefully.
- Educating themselves about the markets’ risks and rewards.
- Effectively communicating with their investment adviser on important issues.
- Keeping their accounts current.
Mutual-Fund Disclosure
According to July 2004 research conducted by Wirthlin Worldwide for SIA, investors feel that information about mutual-fund fees at the point of sale is confusing, difficult to find, and not consistent across fund managers and distributors. As a result, SIA has outlined a set of principles that mutual-fund managers can follow:
- Clearly inform investors of a mutual fund’s investment objectives, past performance, and risk factors.
- Investors should be aware of the management, sales and distribution, transaction, and administrative fees involved in the purchase, ownership, and sale of mutual funds, including breakpoints and share-class alternatives.
- Investors should be clearly informed if incentive-compensation arrangements exist that might potentially influence a broker-dealer or other adviser’s recommendations.
- Disclosure should be in plain English and avoid technical jargon understood only by professionals and regulators.
- Disclosure should be consistent and standardized to enable broker-dealers, other advisers, and investors to compare information from fund to fund.
- Disclosure about management and sales and distribution fees should be clearly and simply summarized in one place.
- Pre-decision information should be based on a standardized amount (such as fees per $1,000) to facilitate comparison among funds.
- Post-decision information (confirmation) should be based on the actual transaction amount – to provide accurate net investment value and appropriate breakpoint discount.
To ensure that companies are putting the concerns of investors first, SIA is recommending that every securities firm conduct a comprehensive review of its business practices, identify sources or potential sources of conflicts, and take specific actions to address them. While each firm’s review would be specifically tailored to their business, certain characteristics should apply:
- Senior-level executives should conduct the review with the right resources available to them.
- The executives should have access to all employees, who should be encouraged to discuss conflicts.
- In addition to the broker-dealer business, the review should include other business lines and affiliated entities.
- Training people to identify conflicts and bring new issues to the attention of senior management.
- Coordinating conflict standards closely with other company standards.
- Incorporating conflict reviews into the internal auditing process.
- Maintaining a conflict review team as a standard operating group.
Research shows that investors are unfamiliar with the role that soft dollars play in the securities industry. SIA is recommending that a clear definition and explanation be adopted by the industry. This will help investors recognize the value of soft dollars and facilitate the transparency of soft-dollar arrangements.
- Soft dollars should be defined as research or brokerage services that a fund adviser receives from a broker-dealer for trades that the adviser directs to the broker-dealer for execution.
- Soft dollars play a valuable role by providing smaller fund advisers access to a broad array of research services, which in turn benefit investors.
- Soft dollars provide incentives for excellence in stock selection and trade timing.
- Soft dollars link the price paid to its value because end-users only pay trade commissions for research ideas they value.
- Soft dollars offer economic efficiencies over hard dollars because prices do not have to be allocated on an individual basis for these services and research analysts can provide research for investors and technical analysis for trading desks simultaneously.
International Regulatory Transparency
Regulatory transparency across the globe is critical to developing worldwide markets that fuel economic growth and job creation, and SIA believes five principles will help encourage this action:
- Regulations and regulatory actions should aim to achieve legitimate, publicly identified policy goals.
- Regulations should be clear, understandable, and publicly available at all times.
- Regulators should consult openly and publicly on proposals for new or changed regulations.
- Regulators should publicize final regulatory actions and make public the basis for them.
- Enforcement should be fair and non-discriminatory.
Over the coming year, SIA will undertake a wide array of actions to educate the securities industry and investors about Commitment to Clarity. This will include expanding the resources available on SIA’s Web site to investors, financial professionals, and the general public; working with Congress, regulators, and elected officials to develop an open dialogue on clarity and the future direction of the securities industry; developing articles by SIA leaders and other experts for op-ed pages and important opinion-leading journals; and, making aggressive efforts to anticipate issues and proactively serve as opinion leaders for the industry.
The implementation of Commitment to Clarity is a significant step in addressing the concerns of investors, regulators, and the public and will encourage an open dialogue about the future direction of the securities industry, Thornburgh said. “I believe strongly that our Commitment to Clarity provides us with a comprehensive set of principles – a platform – that will help us shape our industry. More importantly, this initiative serves as the basis for a wide array of actions to bring our commitment to life.”
To access the Commitment to Clarity, go to: http://www.sia.com/clarity.
