Seven groups representing state securities regulators, investors, and investment advisers are urging leaders of the Senate Banking Committee not to water down language in its draft financial regulatory reform legislation that would require every individual that provides investment advice to be held to a fiduciary duty under the Investment Advisers Act of 1940.

In a letter sent Monday to Senate Banking Committee chairman Christopher Dodd, D-Conn., and the panel’s ranking Republican, Richard Shelby, R-Ala., the groups said they strongly favor a provision in the committee’s draft bill that, “in a straightforward and sensible fashion,” would eliminate exclusions from the act’s ­fiduciary duty that currently exists for broker-dealers acting as investment advisers if their IA work is “solely incidental” to their brokerage ­activities.

Most broker-dealers that provide investment advisory work to ­municipalities are believed to already be dually registered at the Securities and Exchange Commission, market participants said. The SEC, for example, sued the former Dain Rauscher Inc. in a yield-burning case in January 1998, claiming the firm, which served as a financial adviser and investment adviser to ­Arizona, violated its fiduciary duty by failing to disclose excessive markups it charged the state for Treasuries placed into an advance refunding escrow. The case was settled after a federal judge seemed sympathetic to the SEC’s stance.

Market participants said the draft provision in the Senate could apply to smaller firms that are not currently required to be registered as investment advisers. The Senate provision at issue by these groups is separate from another portion of the draft Senate bill that would subject all non-broker ­municipal financial and swap advisers to register with the SEC and subject them to Municipal Securities Rulemaking Board rules.

The groups, which prefer the Senate draft language to a more nebulous provision in the bill the House passed last month, warned that dealer organizations like the Securities Industry and Financial Markets Association, as well as several insurance industry groups, are essentially advocating a less rigorous standard of care or are spreading misinformation about the provision in the Senate draft.

“Unfortunately, some in the industry who have for years actively marketed themselves to investors as trusted advisers are resisting regulation as advisers,” the groups said in the letter, which was signed by the heads of the Consumer Federation of America, the North American Securities Administrators Association and the Investment Adviser Association, among others. “SIFMA, for example, has recently embraced the fiduciary duty in concept, but its unfounded criticisms of the current fiduciary standard under the... act suggest that its goal is to promote a new federal standard that will allow firms to continue conducting business as usual.”

The groups said the insurance industry has launched “a particularly virulent attack” on the legislation aimed at eliminating entirely the provision requiring a fiduciary duty for financial professionals in lieu of “an unnecessary study at taxpayer expense.”

To combat what they see as misinformation about the proposal, the groups also are distributing a six-page myths-and-facts guide explaining some of the widespread misconceptions about the legislation.

A SIFMA spokesman declined to comment on the letter, but the group has said that it supports having the SEC develop and implement a uniform, federal fiduciary standard for financial professionals to increase the standard of care for dealers and IAs when they provide personalized investment advice to individuals.

Spokesmen for Dodd and Shelby could not be reached.

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