A provision to study whether a fiduciary standard should be required in the sale of investment products, and another provision subjecting large insurers to federal systemic risk overseers will likely be included in Senate financial services reform legislation that could be unveiled as early as this week.
The bipartisan legislation being drafted by a group led by Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, and Sen. Bob Corker, R-Tenn., has been the subject of much redrafting.
As to the fiduciary standard, it appears likely that the insurance industry has won a key victory by persuading the bill’s drafters to include in the bill a provision calling for a study of the fiduciary vs. suitability issue.
Consumer and trade groups representing financial planners and investment advisors have mounted a strong public campaign to persuade the committee to include in the bill language contained in legislation proposed by Dodd in January.
Sec. 913 of his bill would have imposed a single harmonious standard in the sale of investment products. It would have done so by deleting an exemption under the Investment Advisors Act of 1940 for any broker or dealer whose investment advice was “solely incidental to his business as a broker or dealer and who receives no special compensation therefore.”
Under that exemption, insurance agents and brokers can sell products under the lesser suitability standard.
But, a letter sent to Dodd by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Id., was apparently decisive in persuading Dodd to substitute their amendment calling for a study of the issue.
The issue is critical because inclusion of the original language would have required the industry to make members of the committee take public votes in favor of insurers and agents as opposed to consumer groups, investment advisors and financial planners.
The two senators argued in the letter that a case has not been made as yet for a total fiduciary standard in sale of investment products.
Their amendment would require the Securities and Exchange Commission to “conduct rulemaking” designed to address regulatory gaps or overlap in regulation related to the standard to be used in the sale of investment products.
The proposed amendment calls for studying the issue, and then proposing 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 letter said the study would also be designed to identify regulatory gaps or overlap in regulation that should be addressed by rule or statute.
Further, the amendment would also require a report to Congress of the SEC’s findings and recommendations.
In seeking to replace the Sec. 913 language, Johnson and Crapo argued that a single standard “would have required thousands of brokers, dealers and their associated persons, who already were subject to registration, oversight and regulation under the Securities Exchange Act of 1934 to also register as investment advisors under the Investment Advisors Act, and to comply with rules under that act as well.”
Since this far-reaching change had 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,” their letter said.
Moreover, this “approach did not appear to account for the differing relationships retail customers have with different financial service providers–some of whom provide comprehensive financial planning or have discretion over customer accounts; others to whom customers look primarily for securities and financial product sales,” the letter said.
“Section 913 did not appear to account for customer choice of financial service providers and, more important, did not address access and affordability issues,” the letter said.
Insurance agents said Dodd is making the right decision by calling for a study of the issue.
Tom Currey, president of the National Association of Insurance and Financial Advisors, said the “other side is overstating the case.”
These are merely “two different ways of doing business. I don’t believe one system is superior to the other, and I do believe they can co-exist, as they have so far.”