Congress passes fiduciary ball to SEC

Financial reform bill compromise gives agency power to bring B-Ds under adviser standard

Jun 27, 2010 @ 12:01 am

By Mark Schoeff Jr.

In signing off last Friday on the most sweeping overhaul of financial regulation since the Great Depression, congressional negotiators took a major step toward empowering the SEC to decide whether stockbrokers should be more accountable to individual investors.

The move is part of the 2,000-page financial-reform bill approved by lawmakers on a House-Senate conference committee, which promises to reshape nearly every facet of the U.S. financial system. The bill goes to the two houses for a final vote and could be approved this week, then handed to President Barack Obama to sign into law.

Included in the bill is language that enables the Securities and Exchange Commission to write a regulation requiring broker-dealers to act in the best interests of their clients and to reveal any conflicts of interest when providing investment advice to retail clients. If passed, the law will give the SEC the authority to impose the same fiduciary standard that applies to investment advisers, harmonizing its oversight of the advice sector.

“Now the debate shifts from Capitol Hill to the SEC,” said David Tittsworth, executive director of the Investment Adviser Association. “All the major decisions on how this affects real people are up to the SEC.”

(Click here for a break-down of what the full financial reform bill means for advisers.)

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, as well as the two-week House-Senate conference that formulated the final bill from each chamber's differing versions, pushed hard for a universal fiduciary duty.

“Our view is that [SEC Commissioner] Mary Schapiro is ready to go forward on it,” Mr. Frank said.

The bill calls on the SEC to conduct a six-month study analyzing more than a dozen issues surrounding the differences between the fiduciary duty and the suitability standard under which broker-dealers currently operate. Suitability requires brokers to assure that a product is appropriate for a client's investment needs and timeline; it allows brokers to sell products from their own inventory.

The SEC must consider the results of the study in any fiduciary regulation that it promulgates. Under the provision, the commission would be empowered to require broker-dealers to act in the “best interests” of clients.

That authority was lacking in the original Senate version but was included in the bill passed by the House.

On the marathon final day of the House-Senate conference committee, lawmakers unanimously approved putting the stronger House language into the final bill.

Now the groups that battled over the fiduciary duty provision are turning their focus to the SEC.

“We will work with the SEC as they conduct the study and consider a fiduciary standard to ensure that small investors have access to affordable and quality financial advice, products and services,” Dale Brown, president and chief executive of the Financial Services Institute, said in a statement.

“It really is a win for the consumer,” said Robert Glovsky, president of Mintz Levin Financial Advisers LLC in Boston and chairman of the Certified Financial Planner Board of Standards Inc. “They laid the foundation for real reform.”

In addition, the agreement harmonizes the enforcement of the standards of conduct outlined in securities legislation of 1934 and 1940.

Although the National Association of Insurance and Financial Advisors applauded the inclusion of the SEC study, it is wary of the fiduciary rule that the agency may eventually promulgate.

“We are disappointed with the decision to allow the SEC to put in place a ‘best interests' standard that will not tie directly to findings from the study,” NAIFA President Thomas Currey said in a statement. “However, we support the House efforts to ensure that the ‘best interests' standard recognizes that no broker-dealer and their registered representatives can violate the standard simply because they receive commissions and sell proprietary products.”

The House and Senate settled on an approach to fiduciary duty that answers many of the concerns that fiduciary advocates had with a compromise offered by Sen. Tim Johnson, D-S.D., on June 22.

Mr. Johnson would have required that the SEC study show definitively that regulatory gaps between advisers and broker-dealers could not be addressed through any regulatory means other than a universal fiduciary standard — subjecting the SEC to lawsuits if it tried to write a fiduciary regulation, according to advocates.

In talks that ranged from overarching issues like too-big-to-fail, derivatives, proprietary trading and a consumer protection agency, fiduciary duty was a low-profile but stubborn sticking point between the House and Senate.

The issue consumed a little over an hour in the public portion of the conference, which often wandered into discursive debates about federal mortgage lending and included references to the Marx brothers and the poet William Butler Yeats.

But the fiduciary duty provision was the subject of behind-the-scenes negotiating that didn't reach a conclusion until the final day of the conference.

In its original bill, the House directed the SEC to write a universal fiduciary standard. The Senate bill required the SEC to study the harmonization of standards for one year and then, if necessary, proceed to rulemaking under its current authority. Critics asserted that the SEC does not have the power to impose a universal standard.

In the end, the House and Senate conferees melded their approaches in a fairly even compromise. The final agreement was swift and anticlimatic.

Mr. Frank announced the House's counter-counteroffer to the Senate side and sent a copy across the cavernous Senate hearing room where the talks were conducted in front of dozens of aides, lobbyists and C-Span cameras — a rare occurrence on Capitol Hill, where formal conferences are infrequent and secret.

Mr. Johnson and three aides huddled over the language for about four minutes before Mr. Johnson said he was satisfied with the proposal. The senators then approved it in a unanimous voice vote.

“That was a major issue,” said Sen. Christopher Dodd, D-Conn., and chairman of the Senate Banking Committee. “I'm glad we were able to come to an accommodation on it.”

Taking the next steps will depend on the SEC because language in the bill said that the agency “may commence a rulemaking” rather than “shall” begin the process.

“We're hopeful that the SEC will exercise that authority,” Mr. Glovsky said.

E-mail Mark Schoeff Jr. at


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