Johnson amendment would let brokers off the fiduciary hook

Feb 16, 2010 @ 10:50 am

By Sara Hansard

Sen. Tim Johnson, D-S.D., is circulating legislative language that would delete a requirement that brokers acting as advisers be registered investment advisers.

The amendment to financial services regulatory-reform legislation, floated last week by the Senate Banking Committee member, would instead substitute a study to be conducted by the Securities and Exchange Commission on regulatory standards for brokers and advisers, coupled with a rulemaking on the issue.

Investment adviser groups have expressed alarm that Congress might ultimately kill the section of draft financial-reform legislation requiring brokers acting as advisers to be registered investment advisers. Adviser groups have supported that provision in draft legislation put forward by Senate Banking Committee Chairman Christopher Dodd, D-Conn., last November.

“The Rand study essentially established that there is rampant consumer confusion between the regulatory standard that applies to investment advisers and broker-dealers,” said Marilyn Mohrman-Gillis, managing director of public policy for the Certified Financial Planner Board of Standards Inc. “We don't need more study to tell us there's confusion here. It just needs to be fixed.”

The Financial Planning Coalition, which consists of the CFP Board, the Financial Planning Association and the National Association of Personal Financial Advisors, is planning to send out a grass-roots alert to get members to contact members of the Senate Banking Committee to oppose the Johnson proposal, Ms. Mohrman-Gillis said. She referred to a study conducted by Rand Corp. for the SEC in 2008 on adviser-broker regulatory issues.

In addition, the Consumer Federation of America is drafting a letter of opposition to the proposal, CFA director of investor protection Barbara Roper said in an e-mail.

Insurance groups have fought hard against the provision, arguing that it would be difficult to operate on a commission-based model if advisers were held to a higher fiduciary standard. Mr. Johnson has sponsored legislation that the insurance industry has called for, most notably a bill that would create an optional federal charter for insurers.

Neither insurance groups could be reached for comment.

“It's still early in the process to be talking about final amendments, but calling for a study followed up with rulemaking by the SEC is not delaying the process, it's finding the best solution to a complex problem," Jeff Gohringer, spokesman for Sen. Johnson, said in an email. The Rand study found that consumers are confused about the differences between broker-dealers and investment advisers, "but there's still disagreement about what should be done to remedy this. The senator wants to make sure that whatever steps Congress and the SEC take moving forward is the right policy to protect consumers."

Under Mr. Johnson's proposed amendment, the SEC would be required to conduct a study on the effectiveness of current legal standards for brokers, dealers and investment advisers, as well as the impact of applying fiduciary standards on brokers and dealers. The agency would have to report to Congress with the study within 18 months of enactment.

The SEC also would be required to initiate a rulemaking on the issue within two years of enactment of the legislation. The rulemaking would have to address regulatory gaps existing between adviser and broker rules to protect investors.

Financial services reform legislation approved in December by the House of Representatives would require the SEC to write new rules extending fiduciary standards to brokers. The Securities Industry and Financial Markets Association has supported that amendment, but adviser groups, consumer representatives and state securities regulators have argued that it could result in weaker fiduciary standards for all advisers.

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