The Senate financial-reform bill introduced by Sen. Christopher Dodd, D-Conn., tackled a lot of difficult issues, made some tough decisions and punted on a relatively easy one — requiring financial professionals who give investment advice to accept fiduciary responsibility.
Instead of addressing the issue directly, the bill merely calls on the Securities and Exchange Commission to conduct a study of whether brokers who give advice should be held to the same fiduciary standards as registered investment advisers.
In the study, the commission would be directed to gauge the effectiveness of existing legal or regulatory standards of care imposed by the SEC and the
Financial Industry Regulatory Authority Inc. on brokers, dealers and investment advisers providing personalized investment advice and who make recommendations about securities to retail customers. The SEC would also determine where the agencies overlapped and whether there were gaps in regulatory coverage.
The SEC also would be directed to study the potential impact on retail customers of imposing the same standard of care on broker-dealers that is applied to investment advisers under the Investment Advisers Act of 1940. It would also look at the ability of investors to understand the differences among brokers, dealers and investment advisers.
No later than one year after the bill were enacted, the SEC would have to submit a report on its findings to the Senate Banking Committee and the House Financial Services Committee. Of course by then, the attention would be off financial reform, so it is possible that the results of the study will be filed and forgotten.
It is ironic that the committee felt that it had the leisure to study this issue. This bill and its House companion propose drastic changes in the nation's financial regulations and will be debated and voted on without awaiting the results of the Angelides Commission hearings into the causes of the financial crisis.
Despite this weakness, the reform bill proposed by the committee has some good provisions for investors. For example, within the SEC it would create an investment advisory committee, made up of investors, to recommend regulatory priorities to the commission. It would also create an investor advocate, who would identify areas where investors had significant problems dealing with the SEC and then provide them with assistance.
The bill would improve the reliability of credit ratings by imposing penalties on credit-rating agencies such as Standard & Poor's and Moody's Investors Service for poor performance and by allowing investors to sue them for “a knowing or reckless failure to conduct a reasonable investigation of the facts.”
Companies selling products such as mortgage-backed securities generally would be required to retain at least 5% of the credit risk, unless the underlying loans met standards that reduced riskiness. They also would be required to disclose more information about the underlying assets, particularly their quality. If mortgage brokers and bankers had been held to this standard in the past, the mortgage crisis likely would never have happened.
The financial-stability oversight council that would be established by the bill would focus on identifying and addressing systemic risks posed by giant financial firms and
investment vehicles that seemed likely to threaten the nation's financial health. This council, made up of the heads of the major federal financial regulatory agencies, would, if it functioned as designed, provide an early warning of a looming financial crisis, to the benefit of investors and the entire economy.
Not every idea in the Senate bill is necessarily a good one, but there are many good ones. Investors now must hope that if it is passed, the House and Senate combine the best features of their respective bills to produce a thoroughbred horse, and not the worst features that leave us with a camel.
