In a highly anticipated move, Senate Banking Committee Chairman Christopher Dodd, introduced his financial regulatory reform bill with a key provision on the fiduciary standard taken out.
The decision by Dodd, D-Conn., which was expected, has frustrated investor groups who want the more stringent fiduciary standard to be applied to brokers as well as to financial planners who already abide by the rule.
“We’re very disappointed that the original section 913 was deleted and replaced with a study,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard, an investment advisor group. “We believe strongly that a study is not warranted, not wanted and not needed.”
Sen. Tim Johnson, D-S.D., has instead proposed that a study be conducted by the Securities and Exchange Commission “to determine appropriate obligations of brokers, dealers, investment [advisors] and their associated persons relating to the provision of personalized investment advice about securities to retail customers.”
Kristina Fausti, the director of legal and regulatory affairs at Fiduciary 360 and special advisor to the committee, expressed concern that the study would take up valuable resources at the Securities and Exchange Commission, instead of allowing the regulatory agency to engage in specific rulemaking.
Under a fiduciary standard, an advisor is required to put the best interests of the clients first and provide disinterested advice. Under a suitability standard, which many brokers now adhere to, an advisor must recommend products that are suitable for a particular client.
Advocates of the fiduciary standard have long complained that the suitability standard does not require an advisor to recommend the best or most cost-effective product to a client and most only prove the product is “suitable” for their needs.
Investor groups, such as the AARP, and regulatory associations such as the North American Securities Administrators Association, which represent state securities regulators, sent a letter to the Senate Banking Committee in support of the fiduciary standard.
In the long run, Rostad doesn’t think the Dodd bill and its study provision will stand in the way of the fiduciary movement juggernaut. “The movement toward a fiduciary standard is not going to stop,” Rostad said. “We’re going to continue to see strong support for it throughout the industry. It’s not clear just how much this bump in the road this is going to be.”
Overall, Dodd’s financial reform bill doesn’t go as far as the proposals issued by the Obama administration. It doesn’t create a freestanding consumer watchdog group however; it would create an independent consumer agency within the Federal Reserve Board. Under the Dodd proposal, that agency would get examination and enforcement power over all banks and credit unions with more than $10 billion in assets and all mortgage-related businesses as well as large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.
The bill also creates an interagency “Financial Stability Oversight Council” for identifying risks and address the “too big to fail problem. The summary said this council would be able to “Break Up Large, Complex Companies.” It would allow the council to be “able to approve, with a two-thirds vote, a Federal Reserve decision to require a large, complex company, to divest some of its holdings if it poses a grave threat to the financial stability of the United States—but only as a last resort.”
In addition, the Dodd bill would create a new resolution system for holding companies; and impose a host of specific requirements including higher capital and leverage standards on large firms that pose a risk to the economy.
The summary also proposes a requirement for “SEC registration for municipal financial advisers, swap advisers, and investment brokers—unregulated intermediaries who play key roles in the municipal bond market.” The bill would subject “financial advisers, swap advisers, and investment brokers to rules issued by the Municipal Securities Rulemaking Board and enforced by the SEC or a designee.”
The Securities Industry and Financial Markets Association, a trade group representing the largest brokerage firms, said, “We hope today’s announcement by Senator Dodd brings us another step closer to enacting the reforms that are vital to strengthening our financial system, this year. We remain committed to supporting responsible reform that balances stronger regulatory transparency and oversight with the industry’s ability to finance America's economic recovery and job creation.
“The industry has been, and continues to, support reforms that protect against systemic risk, end the notion of ‘too big to fail,’ and never again put American taxpayers on the hook. While we may disagree on certain specific policy details, we should not let it distract us from the overall goal of reforming the system. We look forward to working with the Senate as this legislative process continues.”