Brokers may dodge fiduciary requirement, consumer groups say

Feb 3, 2010 @ 3:59 pm

By Sara Hansard

The requirement that brokers who provide advice be regulated as registered investment advisers may be dropped from financial-reform legislation being considered by the Senate Banking Committee, according to consumer groups and state securities regulators.

Fearing that brokers and insurance groups may convince members of the committee to support doing a study only of broker-adviser harmonization, the groups held a telephone press conference today in which they blasted the brokerage and insurance industries, along with the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc.

“In the past week or so, troubling reports have emerged that the committee may be considering eliminating [draft legislation] requirements that brokers that provide investment advice act in the best interests of their clients,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

“Responding to a campaign of misinformation and scare tactics by broker and insurance industry lobbyists, some committee members appear to be leaning toward replacing that provision with a meaningless requirement for a new study,” she said.

The Senate Banking Committee is making final decisions about what provisions will make it into its version of the financial-regulatory-reform bill, which may be marked up at the end of this month.

The groups — the CFA, the North American Securities Administrators Association Inc., AARP, and Fund Democracy Inc. — released a Feb. 2 letter sent to Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala., calling for the provision in the earlier draft legislation issued by Mr. Dodd in November to be retained. Retaining the earlier language would make it more difficult for brokers and insurance agents to continue “questionable sales practices,” the letter said. It pointed to problems with the sale of variable annuities, in particular, as an example of such practices.

Speaking at the press conference today, Ms. Roper said: “An army of industry lobbyists has descended on the Senate Banking Committee,” trying to convince members that brokers and insurance agents would be unduly burdened by having to act as fiduciaries. Contrary to claims by the brokerage industry, requiring brokers giving advice to act as fiduciaries would not deny investors choice, she said; instead, it would simply “limit the ability of brokers to advise investors to make bad choices.”

“We don't need another study,” Ms. Roper said. A 2008 study conducted by the Rand Corp. for the SEC concluded that investors are confused by the differences between brokers and investment advisers, she said.

Texas Securities Commissioner Denise Voigt Crawford, president of NASAA, singled out SEC Chairman Mary Schapiro and Finra for criticism. “Chairman Schapiro has actually supported a standard of suitability, because she said that the suitability standard was equal to or greater than the Investment [Advisers Act of 1940's] standard of care,” Ms. Crawford said. Fiduciary standards provide greater consumer protections, she claimed.

"We are baffled by the criticism," SEC spokesman John Heine said. "The chairman has repeatedly said she favors a strong fiduciary duty standard for both broker-dealers and investment advisers, and that the standard should be at least as strong as the fiduciary standard under the Investment Advisers Act."

Ms. Schapiro was formerly chief executive of Finra, which regulates brokers. Ms. Crawford , who pointed out that Finra's members are all brokers, said that “their positions on these issues become quite suspect.”

The Texas securities commissioner added that in addition to millions of lobbying dollars spent by insurance and brokerage firms, “we also have Finra spending money on Capitol Hill to really decimate any chance of a meaningful Investment Advisers Act fiduciary standard that would inure to the benefit of individual investors in this country.”

Finra spokesman Herb Perone declined to comment.

The SEC did not respond to a query for comment.

The position taken by the Securities Industry and Financial Markets Association, favoring a federal fiduciary standard written by the SEC, “is a significant improvement over the status quo, which is an uneven patchwork system,” Kevin Carroll, managing director and associate general counsel at SIFMA, wrote in an email.

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