While some Senators are working very hard on behalf of their retail investor constituents, other Senators seem to be working hard on behalf of brokers, insurers and banks. It appears, after having met with senior staff at several Senate offices in February and early March, that the elements of the Dodd Bill that are the most crucial for investors are on life support. Senator Tim Johnson (D-South Dakota) wants to amend or replace the fiduciary standard provision in the Bill with a prolonged “study” of not how, but if ,the fiduciary standard should be applied to brokers who provide advice to retail investors. It may well be that strong, pro-investor language in the Investor Protection part of Dodd’s draft Bill, Section 913, will be replaced with Johnson’s call for a study–effectively cutting the fiduciary standard right out of the Bill.
The SEC has been studying this for more than 15 years already, and has issued many major reports, including the SEC’s 1995 Tully Report on broker compensation and the 2008 SEC Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, also known as the SEC Rand Report. It’s also been a topic which was discussed by the SEC’s Investor Advisory Committee on February 22.
Perhaps the subject of any new study ought to be: Why shouldn’t investor’s interests be put first?
Dodd, chair of the Senate Committee on Banking, Housing and Urban Affairs, made a very promising start in November with his Discussion Draft of the Bill. On November 19 it looked like he really got it when he announced on the Senate Banking Committee’s Web site: “The security of our economy is at stake. This is one of those moments in our nation’s history that compels us to be bold.”
Announcing the November draft of the Bill, Dodd said this about “SEC and Improving Investor Protections:”
“Every investor-from a hardworking American contributing to a union pension to a day trader to a retiree living off of their 401(k)-deserves better protections for their investments. Investors in securities will be better protected by improving the competence of the SEC, creating uniform standards for those providing customers investment advice, and giving investors the right to sue those who commit securities fraud.
Why Change Is Needed: The Madoff scandal demonstrated just how desperately the SEC is in need of reform. The SEC has failed to perform aggressive oversight and is unable to understand the very companies it is supposed to regulate. And investors have been used and abused by the very people who are supposed to be providing them with financial advice.“
After Dodd took this stand, the future for all Americans–who need to invest to retire, send children to college or save for any other reason–suddenly looked a lot rosier. After all, investors already believe that the advice they are receiving is in their best interest, according to the 2008 SEC Rand Report. But fiduciary duty toward clients is not legally required, in most cases, of brokers and insurance advisors–even when their titles would lead investors to believe that the advice they are giving is in their clients’ best interest.
An Enormous Financial Services Lobby