PHOENIX-- Like it or not, the financial services industry will be spending a lot of time and money this year dealing with the new rules and fallout from the Dodd-Frank Wall Street Reform Act -- while simultaneously looking down the road to see what's next: A lot of studies.
For now, the immediate concern is sorting out exactly how the SEC and Congress plan to implement a uniform fiduciary standard for broker-dealers and financial advisors, a process that likely won't come to any definitive conclusion until sometime this fall or perhaps early 2012.
Meanwhile, the new legislation has mandated a slew of SEC-led studies in the name of protecting investors that already has the Financial Services Institute and its member companies and advisors on edge.
"The Madoff scandal, the Ponzi schemes and the Great Recession served as a great opportunity for trade organizations and others in D.C. to finally implement a wish list of changes for the securities industry," David Bellaire, general counsel and director of governmental affairs for the Financial Services Institute, told attendees. "Much of what's in Dodd-Frank goes beyond the immediate issues brought forth by the controversies."
Along with the fiduciary duty study, Dodd-Frank calls for studies of :
- Financial planner performance
- Enhancing registered investment adviser exams
- Improving access to registration information
- Broker-dealer auditors by the Public Company Accounting Oversight Board
- Creation of a self-regulatory organization for private funds
- How to best improve investors' financial literacy
Along with taking a lot of time and costing a lot of money, each study portends the possibility of additional and unwanted regulatory requirements for advisors and firms.
But the dramatic shift in power in the House to the Republican party as well as in the leadership ranks of some key Senate committees in November could render many if not most of these studies as little more than interesting data-collecting missions that never manifest in any new legislation.
"The last sweeping act of this type was the National Securities Market Improvement Act of 1996," said Neal Sullivan, a partner with Bingham McCutchen and FSI's outside policy counsel. “We learned that because so many players had to weigh in, it was hard to get any hard, rulemaking from all these studies.”
"At some point, Congress will have to prioritize these studies," he said, adding that it he would be surprised if any specific rulemaking derived from the fiduciary standard report materialized in 2011.
Looking ahead, the panelists said Congress is serious about reforms for the Securities Investor Protection Corporation (SIPC) that could extend coverage to retirement accounts and hedge funds.
The SIPC is a non-profit membership corporation established by Congress which insures securities and cash in brokerage accounts up to $500,000 (up to $100,000 on cash) in the event of brokerage bankruptcy.
In the Madoff fraud, however, a court also approved a SIPC plan to restrict claims to those investors who could prove they sent money to Madoff in the 12 months prior to his Dec. 11, 2008, arrest.
"Madoff investors are finding out SIPC coverage is there but not to the extent they thought," Bellaire said.
Another potential cause for concern, according to the panelists, was the language used in the fiduciary duty study calling for financial professionals to "act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment advisor providing the advice."
"This part of the study calls on the SEC to provide guidance for what kinds of disclosure is provided and to provide examples," Bellaire said. "Our concern is that member groups could be thrown into this fiduciary world and just have to figure it out for themselves. Hopefully, we'll get more specific guidance from the SEC on this."
Sullivan said the nuances of disclosure will spur intense debate and discussion within the industry, the SEC and Congress.
"The expectation from investors I believe should be that the professional they're dealing with can succinctly explain in plain English what the product is and what it's expected to do," he said. "One thing I hope comes out of this from whole process from a regulatory standpoint is that Congress is not trying to create a product for which there's little or no demand."
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