A win for Wall Street in the fiduciary battle

Proponents of the standard say they are disappointed, but they vow to fight on

Mar 21, 2010 @ 12:01 am

By Dan Jamieson

Chalk it up as a win for the securities and insurance industries.

The financial-reform package introduced last week by Senate Banking Committee Chairman Christopher Dodd, D-Conn., dropped an earlier provision that would have imposed a fiduciary duty on anyone offering advice on investments, dealing a blow to those who support the standard.

“We're really concerned now about [Congress] possibly kicking this [fiduciary] reform way down the road,” Marilyn Mohrman-Gillis, managing director of public policy at the Certified Financial Planner Board of Standards Inc., said on behalf of the Financial Planning Coalition. In addition to the CFP Board, the coalition's members are the Financial Planning Association and the National Association of Personal Financial Advisors.

Proponents of a fiduciary standard said that misleading arguments put forth by the insurance industry got Mr. Dodd to back off regarding the fiduciary requirement.

Insurance agents “were worried about sales of their high-cost variable annuities” if held to a fiduciary standard, said Barbara Roper, director of investor protection for the Consumer Federation of America.

But proponents of a fiduciary standard vowed to fight on, even in the face of what might be an uphill battle in Congress.

“A fiduciary duty [for advisers has] worked well for decades,” said David Tittsworth, executive director of the Investment Adviser Association, which supports expanding the duty to securities and insurance sales representatives. “We're going to continue advocating for the same things.”

The Dodd bill is a “bump in the road” in the effort to win approval for a uniform fiduciary duty for brokers and advisers, said Knut Rostad, chairman of The Committee for the Fiduciary Standard, and the regulatory and compliance officer at -Rembert Pendleton Jackson. The advisory firm has about $600 million under management.

“The movement [toward a higher standard] is not going to stop,” said Mr. Rostad, who added that Securities and Exchange Commission Chairman Mary Schapiro, Financial Industry Regulatory Authority Inc. chief executive Richard Ketchum and Lloyd Blankfein, chief executive of The Goldman Sachs Group Inc., have all supported “some variation of a fiduciary standard.” But how each of them defines “fiduciary” has been an issue.

Fiduciary proponents were disappointed that the Dodd bill called only for a one-year SEC study of the issues surrounding adviser and broker-dealer oversight. Proponents see the study as a delaying tactic.

Last week, anticipating that the revised Dodd bill would shrink from imposing a fiduciary requirement, a dozen prominent figures in academia and finance called for all brokers and advisers to be subject to the fiduciary standard as defined under the Investment Advisers Act of 1940.

Several among the signatories to a statement released by The Committee for the Fiduciary Standard, said that a fiduciary duty is critical for investors, as well as for the financial planning profession.

“As the good book says, no man can have two masters,” said John Bogle, founder of The Vanguard Group Inc., and one of the signatories.

“To me, [establishing a fiduciary duty is] about establishing the profession in the minds of the public as a trusted source of advice,” said Don Phillips, managing director at Morningstar Inc., another signatory.

“It just seems like an obvious black-and-white issue,” said Terry Savage, a syndicated financial columnist for the Chicago Sun-Times, and another signatory to the statement.

The committee was formed last year by a group of advisers and planners to promote a fiduciary duty.

Meanwhile, the North American Securities Administrators Association Inc., sent a letter Friday to Mr. Dodd and Sen. Richard Shelby of Alabama, the Senate Banking Committee's ranking Republican, saying that state regulators are “profoundly disappointed” about the exclusion of the fiduciary provision.


What any final legislation might contain in terms of a fiduciary requirement is unknown.

If a bill passes the Senate, it has to be reconciled with the reform bill that passed the House in December. That bill would require the Securities and Exchange Commission to write rules covering brokers who give personalized securities advice to retail customers.

Investor groups want the final bill to include that provision.

“We were strong supporters of the House bill,” Ms. Roper said.

The House legislation calls for extending a fiduciary standard to broker-dealers that is at least as strong as the one that applies to advisers, Ms. Mohrman-Gillis said.

“We remain committed to a federal fiduciary standard established by SEC rulemaking,” similar to what is in the House bill, Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, wrote in an e-mail.

The Financial Services Institute Inc. supports the House approach “in general terms,” said Dale Brown executive director of the group, which represents independent- contractor firms. “But we need to see what the Senate does first before we leap there” and support the House language, he said.

“What we've tried to articulate is that a new [standard of care] is needed so it is workable for all client situations and all business models,” Mr. Brown added.

Given the partisanship in Washington, though, “there is a distinct possibility that nothing will happen” on the fiduciary issue at all, Mr. Tittsworth said. “I think there may be a lot of blood on the floor” from efforts to pass the health care insurance reform bill, which “could poison any legislative attempts” at financial reform, he said.

Even if legislation proves impossible or comes up short, the SEC can take steps on its own to impose fiduciarylike duties on the securities industry, observers said.

Mr. Rostad said that his committee has been communicating with an SEC fiduciary working group, which is focusing on improving compensation disclosures.

The SEC can act by itself to improve “pre-engagement disclosures” of conflicts and “hidden inducements to sell” certain products, Ms. Roper said.

“I am fairly confident [SEC Chairman] Mary Schapiro will take up these issues, and probably has three votes [on the commission] to do much of what we want,” she said.

E-mail Dan Jamieson at djamieson@investmentnews.com.


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