Senate Banking Committee Chairman Christopher Dodd (D-Connecticut) released a draft of financial reforms on March 15 that is extensively re-worded and watered down from his robust November 10 Discussion Draft.

The new version of the proposed Bill contains provisions on “Consumer Protections,”–this version housed at the Federal Reserve rather than as a standalone agency. It also, according to the summary, “Ends Too Big to Fail”, creates an “Early Warning System,” designed to “to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy;” and provides “Transparency & Accountability for Exotic Instruments,” including, Dodd said in his announcement, “hedge funds and derivatives” as well as, “mortgage brokers and payday lenders.” See the draft of the full text of ”Restoring American Financial Stability Act of 2010.”

Perhaps of most interest to wealth managers and their clients, the “Investment Advice” provision of the legislation, ”

The new wording of this critical investor protection part of the reform legislation, requiring a study instead of the fiduciary standard itself, is widely seen as a big break for broker/dealers, and a blow for investors. It is very different from Dodd’s original November 10, 2009 Discussion Draft, (see summary), which contained the requirement that those who provide advice to investors register as investment advisors, thereby requiring them to put their client’s best interests before their own, as fiduciaries. That Discussion Draft also eliminated the broker/dealer exemption allowing advice that is “incidental” to the investment process to be provided by brokers–who are not required, in most cases, to put clients’ interests ahead of their own or their firms’.

The Committee for the Fiduciary Standard, a group of industry leaders who have been invited to meet with senior officials from the SEC, Treasury, House of Representatives, Senate and others to discuss the fiduciary standard and its practical application in everyday situations for those who provide advice to investors, believes that the new Bill’s requirement of a study is unnecessary. The issue of “whether brokers who give investment advice should be held to the same fiduciary standard as investment advisers,” has been studied thoroughly–for at least 15 years, according to the group.This editor is a member of the Committee.

The Committee analyzed the draft amendment–first floated weeks ago by Sen. Tim Johnson, (D-South Dakota)–that substituted the study for the requirement for the fiduciary standard, and found that most of the questions have already been answered by the SEC’s 2008 Rand Report and other information that is already known. Read the Committee’s “Analysis of the Johnson Amendment,” here.

The Committee for the Fiduciary Standard also announced today that a group of Nobel Laureates, academics and Wall Street leaders, including John C. Bogle, founder of The Vanguard Group, George Akerlof, PhD, the 2001 Nobel Laureate in Economics; Daniel Kahneman, PhD, the 2002 Nobel Laureate in Economics; and Roger Ibbotson, PhD, chairman and CIO of Zebra Capital Management, LLC, and finance professor at the Yale School of Management, have urged adoption of the fiduciary standard for all who provide advice to investors. (See related article, “Nobel Laureates Call for Fiduciary Standard.”).

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.