As Senate floor debate on financial-regulatory-reform legislation begins, a key Republican senator plans to offer an amendment on fiduciary standards that could be broader than language contained in a bill that the House passed late last year.
At two hearings last week, Sen. Susan Collins, R-Maine, indicated that she may favor imposing fiduciary requirements on broker-dealers for both retail and institutional investors. An aide to Ms. Collins said that specific language for a specific amendment hasn't yet been drafted.
But during a contentious April 27 hearing, Ms. Collins grilled current and former officials of The
Goldman Sachs Group Inc. on whether they put company profits above the welfare of their clients.
“I raised what I think is an essential issue, and that is whether
Goldman Sachs is acting in the best interests of their clients and whether there should be a fiduciary obligation imposed on broker-dealers, imposed on the large investment companies,” she told reporters as she left the hearing.
The topic has gained momentum just as the full Senate began consideration of the financial-reform bill last Thursday. The process is expected to last a couple of weeks and involve scores of amendments.
The bill that emerged from the Senate Banking Committee in March does not contain language imposing a fiduciary standard on broker-dealers. Instead, it calls for a Securities and Exchange Commission study on whether broker-dealers who provide investment advice should meet the same fiduciary obligation as investment advisers. An amendment written by Sens. Robert Menendez, D-N.J., and Daniel Akaka, D-Hawaii, would add to the Senate bill the provision contained in the House financial-reform bill, which instructs the SEC to move ahead with writing a fiduciary standard regulation for broker dealers.
The House language would apply only to retail investors. In her questioning of
Goldman Sachs executives, Ms. Collins indicated that she favors broader fiduciary coverage.
“That tends to make me think that there is some conversation going on behind the scenes to expand the House fiduciary duty beyond just retail investors,” said Texas Securities Commissioner Denise Voigt Crawford, who also is president of the North American Securities Administrators Association Inc.
The insurance and securities industries oppose applying a universal fiduciary standard because, they contend, it would hamper the ability of brokers to serve their clients and might preclude them from conducting customary business, including selling proprietary products.
It's impossible to tell which side will prevail as the Senate takes up amendments, some of which might require Republican support.
“I'm not sure whether highlighting this issue is going to be sufficient to rally the votes needed for an amendment that would establish a fiduciary standard immediately,” said Dan Barry, director of government relations for the Financial Planning Association.
Nevertheless, Ms. Collins is pressing her case.
The day after the
Goldman Sachs hearing, she engaged in an exchange with SEC Chairman Mary Schapiro about the scope of the fiduciary requirement.
At an April 28 hearing of the Senate Appropriations subcommittee with jurisdiction over the SEC budget, Ms. Schapiro said: “The duty that exists on the investment advisory side does not exist, clearly, on the broker-dealer side, and we need the law to make this a uniform fiduciary duty.”
“And in writing this new rule, like we did, should we distinguish between individual retail investors for whom having that obligation is perhaps even more important — because they're less sophisticated, arguably than most institutional investors — or should it apply across the board?” Ms. Collins asked.
Ms. Schapiro replied: “I think we could step this up over time to be broader, but I would start very clearly with retail.”
The April 27 hearing of the Senate Permanent Investigations Subcommittee examined whether
Goldman Sachs misled its clients by selling them collateralized debt obligations based on shaky mortgages, while purportedly shorting the housing market for its own accounts.
The firm is the subject of an SEC lawsuit alleging that it misrepresented how the CDOs were created.
Goldman Sachs witnesses denied that the firm had done anything wrong.
Fabrice Tourre, an executive director of
Goldman Sachs' structured-products group in London, told the committee that the firm's role was to be a market maker.
“I do not believe that we were acting as investment advisers,” said Mr. Tourre, who was named individually in the SEC suit.
In his testimony, he said that none of his clients were “individual retail investors.” Rather, Mr. Tourre said, they were “sophisticated financial institutions.”
Like her Democratic colleagues on the panel, Ms. Collins expressed frustration with what she said were evasive answers.
During the daylong hearing, Democrats and Republicans combed through internal
Goldman Sachs e-mails for documentation of the main accusation against the firm — that the company profited by unloading toxic mortgage-based products on unsuspecting investors. The background material for the hearing weighed nearly two pounds.
Capitol Hill ire toward Wall Street is causing concern among many financial advisers, who worry that congressional emotion will lead to reform that doesn't make sense.
“I would like them to pass more principals-based legislation,” Richard G. Averitt III, chairman and chief executive of
Raymond James Financial Services Inc., said in an interview. “We would like the members to ask, "Did anyone lose any money on this?' rather than looking to hang a skin on a wall.”
Nancy Caton, a Larkspur, Calif.-based financial adviser who works with
Raymond James, said she is particularly concerned that the reform legislation will prohibit her from being an independent contractor.
“I am worried that they will go in and reform things that don't need to be reformed,” she said.
The process of hammering out the final Senate bill began in earnest April 29, following three straight days in which Republicans prevented the financial regulatory measure from advancing to the floor. The GOP opposed provisions in the bill related to so-called too-big-to-fail firms, a consumer protection agency and derivatives.
Jessica Toonkel Marquez contributed to this story.
E-mail Mark Schoeff at [email protected].
