The fate of a universal fiduciary standard for brokers and financial advisers hinges on the outcome of House-Senate negotiations over the most dramatic overhaul of financial regulations since the 1930s.
After more than three weeks of debate, the Senate on Thursday night approved a giant bill that comprehensively rewrites financial regulation, but does not include amendments addressing fiduciary standards in the financial advisory industry.
Any hope for a universal investment advice rule now rests with the conference members who this week will begin the process of reconciling the differences between the House and Senate versions of the bill.
The 59-39 vote in favor of the financial-reform package, which ran to 1,596 pages, included the support of four Republicans.
Senate Democrats and the White House hailed the victory, saying it moves Washington a step closer to reining in Wall Street excesses and helping individual investors.
Most Republicans criticized the bill, saying that it would hurt community banks, as well as an array of small businesses, such as auto dealers and florists. They also claim that reform will do little to curb the problems that led to the near-collapse of the financial industry in 2008.
Although the Senate considered about 60 amendments during more than three weeks of debate prior to a vote on the final bill, none of them dealt with establishing a universal fiduciary standard.
The difference in the approach that the two chambers took on investment advice is among several issues that have to be reconciled in conference over the next couple of weeks. The reconciled bill would have to be passed by the House and Senate before it can be sent to President Barack Obama to be signed into law.
House Financial Services Committee Chairman Barney Frank, D-Mass., promised quick action.
“I am confident that we can have a bill ready for President Obama's signature very soon,” he said in a statement issued Thursday.
The House bill addresses the fiduciary standard directly. It would instruct the Securities and Exchange Commission to write a rule requiring broker-dealers and insurance agents to act in the best interests of their clients and disclose conflicts of interest — the same standard that applies to investment advisers.
In the Senate, however, that provision garnered little support.
An amendment written by Sens. Daniel Akaka, D-Hawaii, and Robert Menendez, D-N.J., which was almost identical to the one from the House, was not included in the final Senate bill.
Instead, the Senate version contains a provision that calls for a SEC study of the differences between the fiduciary standard and the suitability standard, which applies to broker-dealers. After the study, the SEC would be able to proceed to rulemaking.
Stronger fiduciary proposals — by Sens. Barbara Boxer, D-Calif., Susan Collins, R-Maine, Edward Kaufman, D-Del., and Arlen Specter, D-Pa. — failed to break through the logjam of hundreds of amendments.
Observers said that Mr. Akaka and Mr. Menendez may have backed off because they didn't have enough support to ensure approval of their amendment. That tactic could potentially strengthen their position in House-Senate negotiations because the Senate didn't go on record as opposing the proposal.
“Not having a vote actually increases the chances that something more like the House bill could prevail in conference,” said David Tittsworth, executive director of the Investment Adviser Association.
An aide to Mr. Akaka said the senator intends to continue to push for the fiduciary standard.
“Regardless of how it happens procedurally, as long as it is in the final bill, Sen. Akaka will be happy,” said Jesse Broder Van Dyke, deputy communications director.
Going into the House-Senate conference, the fiduciary standard topic faces the same problem that bedeviled it in the Senate — being overshadowed by bigger issues, such as system risk, proprietary trading, derivatives, and the creation of a consumer protection agency. The traction that the topic gained last month during the hearing at which executives of The Goldman Sachs Group Inc. were grilled over sales practices didn't translate into Senate momentum.
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, and Mr. Frank will have to sort through an array of issues, providing ample opportunities for horse trading.
“It's hard to say which [policies] will prevail and which will be considered trade-offs to get something through quickly,” said Dan Barry, director of government relations for the Financial Planning Association.
An industry lobbyist who asked not to be identified when speculating on the conference process said, “I'm not hearing that it will be in the top five issues.”
The SEC study was put in the Senate bill in place of a stronger fiduciary provision originally backed by Mr. Dodd. A congressionally ordered review is an increasingly popular way to work through difficult issues because it doesn't necessarily squash an idea such as universal fiduciary standards.
The study is supported by Sen. Tim Johnson, D-S.D., Mr. Dodd's likely successor as the banking panel chairman, and Sen. Mike Crapo, R-Idaho. The fact that there wasn't sufficient support to dislodge the provision gives it a boost.
“It illustrates that there is a lot of merit to the idea that this issue has not been studied,” said Jill Edwards, assistant vice president for federal government relations at the National Association of Insurance and Financial Advisors.
Advocates for a universal fiduciary standard take heart from Mr. Frank's support and hope that he will be able to influence the conference.
“You're certainly starting in a good place,” said Knut Rostad, regulatory and compliance officer at Rembert Pendleton Jackson Investment Advisors, and chairman of the Committee for the Fiduciary Standard. “That's huge that he himself prioritizes the issue,” he said about Mr. Frank.
Although lobbying will now concentrate on a handful of members of Congress, the themes will remain the same.
Advocates argue that the fiduciary standard protects people who depend on their investments to cover living expenses and retirement by mandating that their advisers put their needs ahead of company profit and commissions.
“Consumers are relying more and more on broker-dealers and insurance agents who sell securities for advice because these products are not transparent,” said Mary Wallace, senior legislative representative for AARP. “They have very little time to recoup that investment before they retire.”
Brokerage firms and insurance companies, however, assert that imposing a fiduciary standard will impair their ability to conduct their usual business, including selling proprietary products and charging commissions, and could foster litigation.
Moreover, they say that there is no common understanding of the term “fiduciary” or of the rules that broker-dealers already follow.
“The [SEC] study will reveal how much regulation is there,” Ms. Edwards said.
E-mail Mark Schoeff Jr. at [email protected].
