Dodd Bill: Industry Groups See Worms In That Can

Banking Committee colleagues who attended the press conference included Sens. Jack Reed, D-R.I.; Charles Schumer, D-N.Y.; Robert Menendez, D-N,J.; Daniel Akaka, D-Hawaii; Jon Tester, D-Mont.; Mark Warner, D-Va.; Jeff Merkley, D-Ore.; and Michael Bennet, D-Colo.

Industry lobbyists are expecting to see Dodd revise the bill in response to comments by Monday, then to have his committee start marking up the bill Tuesday.

Section 913 of the bill would require virtually every broker-dealer to register as an investment advisor and to adhere to a fiduciary standard, according to Sarah Spear, director of policy and public affairs at the Association for Advanced Life Underwriting, Falls Church, Va.

Traditionally, the government has applied the fiduciary standard to investment advisors, meaning that advisors have had to act solely in the interests of the customers.

Most broker-dealers and B-D sales representatives were required only to meet a suitability standard, meaning that they had to try to verify that the products sold to investors were suitable for those investors.

If the Dodd draft is implemented as written, the Investment Advisers Act would be amended to delete the current exclusion from the fiduciary standard for broker-dealers whose advice is incidental to the conduct of their business and who therefore receive no special compensation for such advice.

“This is a more extreme approach than that taken by either the [Obama] administration or the House,” Spear says.

“Perhaps most troubling, what started out in the administration’s draft as an effort to provide the [U.S. Securities and Exchange Commission] with authority to engage in rulemaking to provide for a harmonized fiduciary standard of care, has become, in Dodd’s draft, a significant expansion of the application of the Investment Advisers Act to all broker-dealers, other than mere order takers,” Spear says.

“If enacted in its current form, virtually all AALU members offering variable products will be required to register under the Investment Advisers Act,” she says.

The National Association of Insurance and Financial Advisors, Falls Church, Va., also is expressing grave concerns about the bill.

“The Senate Banking Committee draft, if adopted into law, would have huge ramifications for NAIFA members and the way agents and advisors interact with clients or potential clients,” says NAIFA President Thomas Currey. “Any agent or financial advisor licensed as a registered representative because of the sale of variable life insurance, annuities or mutual funds would be confronted with major changes in how they do business.”

NAIFA believes the House Financial Services Committee has made many positive changes in its financial services legislation, Currey says.

“From first reading of the Senate draft, considerable challenges appear to lie ahead if the bill is to reflect the realities of the market place in which agents and advisors work with their clients,” Currey says.

In addition to imposing a fiduciary standard on broker-dealers, the Dodd draft would:

- Arm the U.S. Securities and Exchange Commission with additional authority to impose stronger consumer protections on sales of investment products – including insurance products and annuities — to seniors. The SEC would be required, for example, to crack down on misleading use of professional designations in efforts to sell financial services products to seniors. (Section 989A)

- Give state securities regulators and state insurance regulators incentives to take more steps relating to sales of financial products to seniors, such as adopting suitability mandates. (Section 989A)

- Give public company shareholders a non-binding say on pay. The compensation provisions also would require that compensation committees be independent, and that public companies set clawback policies, to ensure that they can take back executive compensation that is paid based on inaccurate financial statements, according to AALU experts. (Title IX, Subtitle E)

- Enact the Nonadmitted and Reinsurance Reform Act of 2009 into law. (Title V, Subtitle B)

- Create a Consumer Financial Protection Agency. The House now seems to be likely to exclude insurance from CFPA oversight; insurance industry legislative analysts are still looking to see how the Dodd draft CFPA might relate to the insurance industry. (Title X)

- Create an Agency for Financial Stability. (Title I)

- Create an Office of National Insurance at the U.S. Treasury Department. (Title V, Subtitle A) and authorize the ONI to conduct an insurance regulatory modernization study.

- Enact many changes designed mainly to affect the banking and securities industries. The bill would, for example, create a new super bank regulator, the Financial Institutions Regulatory Administration, which would take over the banking supervision duties now handled by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve System. The OTS and the OCC would be abolished, and the FDIC and Fed would lose their authority to act as bank regulators. (Title III)

- Regulate hedge funds. (Title IV)

– Impose new regulations on the swaps market and other over-the-counter derivatives markets. (Title VII)

- Require insurers to contribute to a fund that would be used to resolve insolvencies of large financial services companies. (Page 207, in Section 208)

WASHINGTON BUREAU — The Restoring American Financial Stability Act of 2009 discussion draft is long enough to have room for many troubling provisions, insurance industry Congress watchers say.

The 1,163-page draft bill would impose a sweeping fiduciary standard on the sale of securities by insurance agents, industry officials say.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee, unveiled the draft today at a press conference.