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Senators Explain Why They Want Fiduciary Standard Study

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WASHINGTON BUREAU — Two members of the Senate Banking, Housing and Urban Affairs Committee say they want further study of the idea of applying the fiduciary standard to broker-dealers because they do not believe advocates have made a convincing case for creating a total fiduciary standard.

Two members of the Senate Banking, Housing and Urban Affairs Committee say they do not believe advocates for creating a total fiduciary standard have made a convincing case.

Sen. Timothy Johnson, D-S.D., and Sen. Michael Crapo, R-Idaho, have expressed that opinion in a letter to Sen. Christopher Dodd, D-Conn., chairman of the committee, explaining why they are seeking more study of the fiduciary standard issue.

Because the idea of applying the fiduciary standard to broker-dealers as well as to investment advisors has not been the subject of committee hearings, “we had no ability to evaluate whether investors would be better protected under this additional regulatory scheme, or the proposal’s cost or impact,” Johnson and Crapo write.

Johnson has refused to make the letter public; National Underwriter obtained a copy of the letter from another source.

Consumer groups and financial planning groups want Congress to apply a fiduciary standard of care both to investment advisors and to broker-dealers that provide personalized financial advice.

The standard would require both investment advisors and broker-dealers to act only in the best interest of their customers.

Insurance producers want Congress to continue applying a fiduciary standard of care to investment advisors and a suitability standard to broker-dealers.

The suitability standard requires only that a financial professional verify that a product sold to an individual suits the needs of that individual.

Insurance producer groups note that agents and brokers often have contracts with a limited number of financial products providers and may have no practical way to comply with a fiduciary standard.

Consumer groups contend that the standard-of-care issue has been well-studied, and that members of Congress who are asking for further study are stalling for time.

Industry group and consumer group officials have said that they believe Dodd has agreed to replace the original total fiduciary standard provision in Section 913 of his financial services reform bill with a Johnson-Crapo amendment calling for the U.S. Securities and Exchange Commission to study the issue.

Some say Dodd will introduce a revised bill next week.

The Johnson-Crapo amendment would require the SEC to “conduct rulemaking” designed to address regulatory gaps and overlaps in regulations related to the standard of care to be used in investment product sales.

The SEC then could propose a rule that would address the “findings and conclusions of a comprehensive study of the effectiveness of existing standards of care for protecting retail customers.”

The study amendment is necessary not only because the Senate has not held hearings on the standard-of-care issue, but also because the original version of Section 913 did not address access affordability, or customer choice concerns, Johnson and Crapo write.