Once investors understand those differences, where do you think they will go? It may well be that a “study” of whether brokers should put their clients’ interests first–as called for in the Senate’s new version of financial reforms–will call even more attention to the differences between those who put client’s interests first and those who don’t have to.
Both the House version of financial reforms, passed last December, and the Senate’s draft of November 10, look more robust in some ways than the Senate’s current proposal of financial reforms, the Restoring American Financial Stability Act. The House bill followed more closely the guidance from the Obama Administration, Treasury and SEC in the June blueprint for financial reform.
The new version of the Senate’s proposed Bill, proposed by Senate banking committee Chairman Christopher Dodd, (D-Connecticut), was voted out of committee on March 22. The Senate bill contains provisions on “Consumer Protections,”–although this version houses the group within 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 the March 15 announcement, “hedge funds and derivatives” as well as, “mortgage brokers and payday lenders.”
Of note for investors and wealth managers, the new Senate bill significantly weakens Investor Protections from what was mandated in its November draft–and from what is in the bill the House passed. In particular, the new bill deletes the call by the Obama Administration, SEC, and many regulatory and industry leaders, to extend the fiduciary standard to all who provide advice to investors. The Senate’s November version called for:
“Uniform Standards for Advisors: Mandates uniform standards for anyone providing customers investment advice, eliminating different standards for broker-dealers and investment advisers. Small investors should have uniform protections regardless of the title of the financial professional serving them has.”
The November Senate version had also required advice to be given in the “Best Interest of the Client: Brokers who give investment advice will be held to the same fiduciary standard as investment advisers – they will be required to act in their clients’ best interest.”
So it’s disappointing that the March 15 Senate version strips out the language above, substituting this: “Investment Advice: Requires a study on whether brokers who give investment advice should be held to the same fiduciary standard as investment advisers – should be required to act in their clients’ best interest.”
Should brokers who give investment advice “be required to act in their clients’ best interests?” That is the question! (My apologies, Will Shakespeare)
What happened between November and March? For one thing, the insurance industry has said publicly that they will be not able to sell annuities if they have to put clients’ interests first. Perhaps there should be a study on why that’s the case.
There is overwhelming consensus that the fiduciary standard should be extended to all who give investment advice. President Obama, the U.S. Treasury, House of Representatives, SEC Chairman Mary L. Schapiro, FINRA CEO Rick Ketchum, Goldman Sachs Chairman and CEO Lloyd Blankfein and Commodities Futures Trading Commission Chairman (and former Goldman Sachs executive) Gary Gensler all support such a provision.
In addition, Nobel Laureates, economists and industry leaders have called for extension of the fiduciary standard–see “Nobel Laureates Call for Fiduciary Standard.” This editor is a member of The Committee for the Fiduciary Standard.
The original Senate version of November 10 included the requirement that brokers who provide advice to retail investors must register as investment advisors, thereby extending the fiduciary duty that investment advisors have had since the enactment of the Investment Advisers Act of 1940, to brokers. The November 10 Senate version also took away the broker/dealer exemption that allows brokers to give advice without holding them to the fiduciary standard, allowing them to give advice that was “suitable” but not necessarily in the client’s best interest.
The new Senate version substitutes a study of whether the gaps in regulation of broker/dealers and investment advisors are bad for investors, and if brokers need to put clients’ interests before their own. Seriously. See related article about payments to the Senate banking committee’s members from the financial services lobby, “Will Dodd’s Legacy be Anti-Investor, Pro Broker and Insurer?” in which a report notes that Senate Banking committee members have received $41.9 million in campaign contributions from financial services PACs and individuals since 2005.