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Regulation and Compliance > Federal Regulation > SEC

Will Dodd's Legacy be Anti-Investor, Pro Broker and Insurer?

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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

But over the past three months, it appears that the very active–and well shod–financial services lobbyists have pressed their case with Dodd and many others on the Senate Banking Committee, and seem to have big wins in store for their broker, bank and insurance clients. And it’s no wonder when you look at the dollars that pour in to Senators on this committee from these industries.

According to a report, “Financial Sector Investments In Congress and the Senate Banking Committee,” from the group Consumer Watchdog, Dodd received, from 2005 to 2009, “$9 million from the financial sector, 51% of his fundraising over the five-year period. Ranking member Richard Shelby (R-AL) raised $2.5 million, 28% of his total money raised, from the financial sector.” The report says that in the first nine months of 2009 alone, 2567 lobbyists for the Financial Sector spent $ 336,005,436. to lobby Congress.

The report studied four ways the industry exerts its influence on Congress, “campaign contributions, fundraising, lobbying and the revolving door between financial firms and the Senate Banking committee that may determine the fate of financial reform legislation.” The report notes that “Senate Banking committee members have received $41.9 million in campaign contributions from PACs and individuals in the financial sector since 2005.”

Perhaps it shouldn’t be so surprising that the Banking Committee did such an about face since last November, turning from important financial reforms and investor protections to protecting the interests of those banks, brokers and insurance companies that pay them so well. The Consumer Watchdog report explains: “Last November, Chairman Dodd tasked himself and seven other Banking committee members with re-drafting the major sections of financial reform legislation. These eight senators-Dodd, Shelby, Corker, Crapo, Gregg, Reed, Schumer, and Warner-have received the lion’s share of financial sector contributions to the committee: a total of 26.1 million. Seven of the eight (excepting Sen. Gregg) rank among the committee’s top 10 recipients of financial sector donations.”

One thing that lobbyists havent been talking to Senators about is the fact that the majority of broker/dealer reps. believe that “all financial professionals who give investment and financial advice should be required to meet the fiduciary standard,” according to The Fiduciary Standard Survey, conducted in November by SEI and The Committee for the Fiduciary Standard. This editor is a member of that Committee. In addition, the study found that the majority of brokers believe “advisors should not be permitted to ask clients to waive their right to a fiduciary standard of care from the advisor.”

It remains puzzling why the Treasury and Obama Administration, after calling for a fiduciary standard for those providing advice to investors–as well as other consumer protections–appear to have caved in to the special interests as well. They’ve been totally silent, of late, on the investor protection issue.

In fact, it’s been industry participants and regulators who have called for extending the fiduciary standard to brokers who provide advice to retail investors. Extension of the fiduciary standard to those who provide investment advice to retail investors has been endorsed by the Treasury, White House, House of Representatives in their Bill which passed in December, SEC Chairman Mary L. Schapiro, SEC Commissioner Luis Aguilar, Goldman Sachs Chairman and CEO Lloyd Blankfein and Commodities Futures Trading Commission Chairman Gary Gensler.

It’s not too late–there is still an opportunity to make a major difference for American savers, investors and retirees. It will be a shame if it is traded away because of the brokers and insurance companies–setting the stage for yet another disaster.

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.


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