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Proposed Financial Reform Endangered by "Hat Switching" Provision

The investment adviser world is frenzied over a provision included in the financial services reform legislation recently approved by the House of Representatives. The so-called, “hat switching,” provision is one sentence long and buried within the expansive legislation. The provision, part of H.R. 4173, reads as follows:

“Nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing personalized investment advice about securities.”

This can be read as meaning that the fiduciary standard owed to a client disappears once investment advice is given.

The move towards creating a single fiduciary standard would be greatly hindered if such a provision makes it into the final language of the bill. The provision would protect discount brokerage firms from a continued fiduciary relationship with a client after initial advice and/or sale of a product.

It can be expected that this is not the last time we will hear of this provision.