Washington Watch: Fiduciary Wrangling Resumes

It would lead, the insurance groups went on to say, to “reduced customer access and service, reduced financial protection for Americans, and loss of capital formation and jobs.” Section 913 “would force life insurance agents who already are qualified as registered representatives and supervised by the SEC and FINRA to register as investment advisers–and thereby take on more responsibilities, more expenses, and more liability.”

Section 913, if enacted, the groups continued, “would force thousands of our members to limit the product choices available to their customers, the majority of whom are middle-market consumers who look to us for insurance and retirement products.”

But the CFA, IAA, Fund Democracy, FPA, NAPFA, and others writing the January 7 myths/facts sheet (available here) state that it is indeed a myth that Section 913 imposes a one-size-fits-all regulation on all financial services professionals, denying investors access to valued products and services.

The “fact,” the groups say, is that Section 913 of the bill “does one thing, and one thing only: it requires broker/dealers and broker/dealer sales representatives who act as investment advisers (providing advice about securities for compensation) to be regulated as investment advisers, closing a regulatory loophole that has led to substantial investor confusion and abuse. The legislation leaves financial services providers free to offer services that do not constitute investment advice without triggering regulation under the Advisers Act.”

Another myth, these groups say, is that Section 913 applies “to either insurance sales or advice about insurance, even for individuals who also offer investment advice and would be regulated as advisers under Section 913 with regard to that advice.” It also “does not apply to the many activities engaged in by full-service brokers that do not entail advice about securities for compensation (e.g., executing trades, underwriting securities, making markets).”

The Levitt-Donaldson Group

The Investors’ Working Group (IWG)–co-sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market Integrity, and co-chaired by former SEC chairmen Arthur Levitt and William Donaldson–recently offered recommendations to both the House and Senate on what a final financial services reform bill should look like. For instance, IWG said that a final bill should include the provision offered in the House’s Wall Street Reform and Consumer Protection Act of 2009, which provides the SEC with an increased budget, as well as the provision in the Senate’s discussion draft providing the SEC with a self-funding mechanism.

The IWG believes “that SEC should have both more stable long-term funding and a self-funding mechanism that maintains sufficient resources and enhances independence,” the group said. “The SEC’s funding has simply not kept pace with the explosive growth of the securities markets over the past two decades,” IWG continued. “Today, the agency monitors 30,000 entities, including more than 11,000 investment advisors, up 32% in only the last four years. Even so, from 2005 to 2007, the SEC’s budgets were flat or declining. On occasion, the Commission has shown reluctance to exercise its authority in certain areas out of fear of political budget retaliation.” It is no coincidence, therefore, the IWG says, “That these pockets of poor oversight proved to be sources of great risk. Sufficient, stable, long-term funding that is removed from the Congressional appropriations process is critical to strengthening the independence and effectiveness of the SEC and would address one of the major contributing factors to the financial crisis.”

Speaking of the financial crisis, the Financial Crisis Inquiry Commission (FCIC) held its first public hearing on January 13 and 14 and heard testimony from the leaders of the biggest Wall Street banks on the root causes of the global financial crisis. FCIC’s mandate–set out by the Fraud Enforcement and Recovery Act of 2009–is to examine the causes, domestic and global, of the current financial and economic turmoil in the United States.