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INsider: Barney Frank — the financial services industry's unlikely ally

In a surprising twist, the influential Democrat has helped slow down efforts to expand fiduciary duty

Sep 29, 2011 @ 2:22 pm

By Mark Schoeff Jr.

When Republicans gained control of the House in the 2010 election, the Massachusetts Democrat lost the chairmanship of the House Financial Services Committee. But that doesn't mean he no longer exerts influence on policy affecting the financial services industry.

In fact, when Mr. Frank intervenes, he carries as much weight, if not more, than his Republican colleagues. In part, that's because Mr. Frank, as the ranking minority member of the committee, may have more influence with the regulatory agencies, which are working under a Democratic administration.

Oddly enough, in some of these cases, Mr. Frank has taken strong positions that favor the financial services industry. And that stands seemingly in contrast with his work as the co-author of the Dodd-Frank Act, one of the most sweeping financial reform laws in U.S. history.

The latest example of this was the Labor Department's recent withdrawal of a controversial proposed rule to expand the definition of “fiduciary” for those providing advice to retirement plans and their participants. The rule change was aimed at protecting investors.

A wide range of industry groups — including both supporters and opponents of universal fiduciary duty for retail investment advice — opposed the DOL rule because they said that it would hurt the brokerage business, and curtail the number of advisers available to 401(k) plan participants and those holding individual retirement accounts.

The outcry did little to sway the Labor Department. At a House subcommittee hearing on July 26, Assistant Labor Secretary Phyllis Borzi, who was spearheading the regulatory change, said that she was listening to criticism, but still intended to promulgate a final rule by the end of the year. The agency pulled back, however, Sept. 19, when it announced that it would withdraw the rule and re-propose it in early 2012.

What changed between July 26 and Sept. 19?

Ms. Borzi said the decision to withdraw the rule was hers alone, but some people, including Rep. Carolyn McCarthy, D-N.Y., a member of the Financial Services Committee, believe the Obama administration, promoting its regulatory reform program, had something to do with it. In addition, the president is facing a tough re-election and doesn't need more enemies than he already has on Wall Street.

The other change in the political landscape between July 26 and Sept. 19 was that Mr. Frank made his position clear on the DOL fiduciary duty proposal.

“I agree that [federal retirement law] rules may need to be updated,” Mr. Frank wrote to Labor Secretary Hilda Solis in a Sept. 15 letter. “But it is important to do this in a way that does not have adverse effects on the choices available to consumers, municipalities and pension plans, among others. Given this, I strongly urge you to withdraw and re-propose your rule, in coordination with both the Securities and Exchange Commission and the Commodity Futures Trading Commission.”

The Financial Services Institute Inc., which represents independent broker-dealers and has been in the vanguard of opposition to the DOL rule, touted Mr. Frank's letter as an example of growing bipartisan concern about the rule.

Mr. Frank also publicly interjected himself into the debate on possible fiduciary duty rule changes at the SEC that would force brokers to act in the “best interests” of their clients rather than simply recommending investments that are “suitable.” The potential extension of the fiduciary standard was triggered by Dodd-Frank.

But the SEC has been encountering strong resistance to its fiduciary rule making from Capitol Hill Republicans. Meanwhile, it turns out that Mr. Frank is trying to keep the agency from exceeding the bounds set by Congress for fiduciary reform.

In a letter to the SEC earlier this year, he cautioned the SEC not to impose the 1940 Investment Advisers Act fiduciary duty requirements on broker-dealers — something investor rights groups favor but many in the financial services industry oppose.

“The new standard contemplated by Congress is intended to recognize and appropriately adapt to the differences between broker-dealers and registered investment advisers,” Mr. Frank wrote in a May 31 letter to SEC Chairman Mary Schapiro.

The Securities Industry and Financial Markets Association, which opposes imposing the current fiduciary standard to brokers, pointed to Mr. Frank's letter as support of its argument that the SEC should take a fresh approach to fiduciary duty.

Within the past two weeks, the SEC buckled and said it won't propose a universal fiduciary duty under its original timetable and instead will delay a self-imposed deadline in part to sift through all the advice it has received about a potential regulation.

Why is Mr. Frank championing the interests of those looking to slow down fiduciary reform?

Mr. Frank's spokesman would not comment, saying that InvestmentNews had not given him enough time to respond.

But as a member of Congress, Mr. Frank, of course, has to listen to and be responsive to the concerns of his constituents. His district encompasses suburban Boston, a city where several major financial firms are headquartered, including Fidelity Investments, State Street Corp. and Putnam Investments. Fidelity and State Street alone employ more than 20,000 people in Massachusetts.

In the 2010 election cycle, Fidelity and State Street were two of Mr. Frank's top five campaign funders, donating $81,300 and $26,000, respectively to his $4 million campaign war chest, according to the Center for Responsive Politics All five of Mr. Frank's top contributors were from the financial services industry.

Jennifer Engle, a Fidelity spokeswoman, wrote in an e-mail: “We greatly appreciate his perspective on and attention to this issue.

"While we can't speak for Congressman Frank or other Massachusetts financial services companies, his letter [to the DOL] reflected our concerns — as well as many others in the industry — about the proposed rule.”

Barbara Roper, director of investor protection at the Consumer Federation of America, believes Mr. Frank's actions on behalf of the financial services industry simply shows that he's being pragmatic about the regulatory process.

“He's practical,” Ms. Roper said. “I don't see his motivation as serving the industry as much as getting something done that will work.”


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