More On Legal & Compliancefrom The Advisor's Professional Library
- U.S. Securities and Exchange Commission Information This information sheet contains general information about certain provisions of the Investment Advisers Act of 1940 and selected rules under the Advisers Act. It also provides information about the resources available from the SEC to help advisors understand and comply with these laws and rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
As Investment Advisor went to press in mid-May, lobbyists and Congressional staffers were optimistic that the Senate would finish a vote on Senator Christopher Dodd's (D-Connecticut; above, right) financial services reform bill by May 19. The final vote on the Senate bill will set into motion the next step on the road to financial services reform, which is for the Senate and the House to reconcile their bills.
As the days drew closer in mid-May for Senate Banking Committee Chairman Dodd and Senator Richard Shelby (R-Alabama; above, left), ranking GOP member on the Committee, to unveil their manager's amendment--which includes the final list of amendments that Dodd and Shelby will indeed add to their bill--lobbyists and industry officials believed that very few of the 190 amendments that had been filed would actually find their way into the final bill. Washington observers expect that once the Senate bill passes, the Senate and House will have a goal of reconciling their bills before Congress's July recess.
Of particular interest to the advisory profession, of course, is how the House and Senate will harmonize their two bills' language regarding fiduciary duty--the House reform bill includes imposing a fiduciary standard on brokers, while the Senate bill does not. Since being reported out of the Senate Banking, Housing, and Urban Affairs Committee, Chairman Dodd's bill has included Senator Tim Johnson (D-South Dakota) and Senator Mike Crapo's (R-Idaho) provision (known as Section 913) requiring the Securities and Exchange Commission (SEC) to study, once again, the obligations of broker/dealers and investment advisors. The Johnson/Crapo provision replaced the original language in Dodd's bill, which would have required brokers to adhere to a fiduciary standard of care.
Securities and Exchange Commission (SEC) Chairman Mary Schapiro has been imploring Dodd to make sure that the final financial services reform legislation gives the SEC the authority, at the end of the study that the Johnson/Crapo provision requests, to write a fiduciary standard for all financial services professionals. As Schapiro told Investment Advisor in a recent interview: "At the end of that study, we need the authority to go ahead and take action. [The legislation] doesn't give us that authority. That's the real flaw from our perspective....The bill needs to give us the ability to create the fiduciary standard of conduct for all professionals at the conclusion of the study, and that's the piece that's so critical that's missing."
A Recurring Theme
Before debate began in the full Senate on Dodd's bill, Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-New Jersey) introduced a fiduciary amendment that would replace Section 913 of Dodd's reform bill, the Restoring American Financial Stability Act, with the House reform bill's provision requiring brokers to adhere to a fiduciary duty. Since the Senate debate began, the SEC filed fraud charges against Goldman Sachs on April 16, alleging that Goldman engaged in fraud in building and selling collateralized debt obligations (CDOs) tied to subprime residential mortgages. Congress held a series of hearings after the SEC filed its suit, and grilled Goldman execs; one issue that came to the fore during those hearings was Goldman's apparent lack of adherence to a fiduciary standard, albeit a fiduciary duty at the institutional level. This sparked a rash of fiduciary amendments to Dodd's bill. Senator Richard Durbin (D-Illinois), Chairman of the Senate Appropriations Subcommittee on Financial Services, joined as a cosigner to the Akaka/Menendez amendment after the series of Goldman hearings.
Another member of the Senate Subcommittee on Financial Services, Susan Collins (D-Maine), told SEC Chairman Mary Schapiro during her testimony on April 28 that Goldman executives did, indeed, "dance around" the fiduciary-related questions that were posed to them. Collins then asked Schapiro if a fiduciary duty should apply to brokers. Schapiro replied: "It absolutely should." Soon after the series of Goldman hearings, Collins announced that she would craft her own fiduciary amendment to add to Dodd's bill.
Senator Arlen Specter (D-Pennsylvania) also put forth an amendment to Dodd's bill regarding fiduciary duty, but his amendment "would impose a fiduciary duty on brokers in almost all cases, so it's not just tied to investment advice," points out David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington. "That goes well beyond what we [IAA] or the [Obama] Administration or other groups that have been supporting extending the fiduciary duty have talked about." Senator Barbara Boxer (D-California) is yet another senator who joined the fiduciary amendment bandwagon.
Given that Senator Tim Johnson is anticipated to replace Dodd as the next chairman of the Senate Banking Committee, he may be reluctant to let his provision in Dodd's bill asking for the SEC to study advisor and broker/dealer obligations be compromised. "The Johnson/Crapo study provision is in the bill now--it's bipartisan and Dodd agreed to put it in the bill when it was reported out of the Banking Committee," says Tittsworth. "Therefore, I think Akaka/Menendez/Durbin--and other senators who are now looking at fiduciary duty provisions--have an uphill fight to change the bill." Even if the Johnson/Crapo study remains in the Senate bill, Tittsworth adds, "there will have to be agreement with the House before any final legislation is enacted."
David Bellaire, general counsel and director of government affairs for the Financial Services Institute (FSI), says, "It's important to note that the Johnson/Crapo study was added to the bill while Senator Dodd was still in charge of crafting the bill, so I think that indicates some level of agreement or support from Senator Dodd." FSI has been a staunch supporter of the Johnson/Crapo provision. "We're hopeful that, despite the fact that there are senators who are interested in pursuing other [fiduciary] options, this [Johnson/Crapo] provision will remain intact."
But Bill Glovsky, chair of the CFP Board and a member of the Financial Planning Coalition, which supports the Akaka/Menendez/Durbin amendment (see "Long-Term Progress Reported by Financial Planning Coalition"), told reporters on a conference call on May 12 that the Coalition is "cautiously optimistic" that the Akaka amendment would make it into the final financial services reform bill.
As to whether the final legislation will give the SEC the authority to create fiduciary rules for advisors and broker/dealers, Bellaire says that he believes Senators Johnson and Crapo want to "force the SEC to come back to them with the study. I think the Senate wants to remain involved and give Congress a role.... So I'm not entirely sure [Congress] will grant the SEC all of the basket of authority that it wants" regarding fiduciary rulemaking. Instead, he suggested, Congress is "intentionally leaving things vague so they can remain a player in the process."
The debate over applying a fiduciary standard to brokers "has been overly simplified to a fiduciary and suitability debate," says Bellaire. "What the debate is really about, and the [Johnson/Crapo] study recognizes, is that we are talking about how we protect consumers; how do we enhance protection no matter who the person is dealing with? That's more than just the standard of care... It involves supervision and examination by regulators; it involves jurisdictional boundaries, and how we implement [a fiduciary standard] across the great variety of business models that exist in the market and the different types of investors that exist."
But industry groups like the Financial Planning Coalition and the North American Securities Administrators Association (NASAA), as well as consumer groups like the Consumer Federation of America, were making last-ditch efforts in mid-May to convince members of Congress that a fiduciary mandate on brokers was an essential part of financial services reform, and the best way to protect consumers. Glovsky said during the May 12 conference call that "now is the time to act; not to do more study" on whether a fiduciary duty should be applied to brokers. Richard Salmen, chairman of the Financial Planning Association (FPA), said on the conference call that one of the myths surrounding the application of fiduciary rules to brokers is that the issue has not been "adequately studied." The SEC, Salmen said, "has been looking at this issue since the mid-1980s when brokers began offering financial planning services." Then in 1999, the SEC compiled a "huge" study "on how to appropriately regulate financial advisory services by brokers as part of that agency's consideration of various proposals, especially with the advent of fee-based brokerage accounts." Then came the Rand study in 2008 of investors' understanding of the differences between advisors and brokers.