Washington Watch: The Shape of Reform Begins to Sharpen

But the Financial Services Institute (FSI) is one group that supports the Johnson amendment. David Bellaire, general counsel and director of government affairs for FSI, says that while the Rand study focused on the investors’ perceptions and understanding of the differences between brokers and advisors, “it did not study solutions to what it highlighted. That’s really what the SEC study would do” under the Johnson amendment.

Straying Far Afield

Dodd’s revised reform bill strays significantly from the proposal that he floated last fall, specifically in that it creates a separate Consumer Financial Protection Agency (CFPA) within the Federal Reserve, not a standalone agency as he originally proposed. Dodd’s new bill also would create a council of regulators to work with the Federal Reserve Board to oversee systemically risky financial institutions; impose tough new capital and leverage requirements on banks; and would establish an Office of National Insurance, a new office within the Treasury Department to monitor the insurance industry. Dodd’s bill would also give the SEC and CFTC the authority to regulate derivatives.

Hedge funds would also have to register with the SEC under Dodd’s new bill, and the assets threshold for federal regulation of investment advisors would be raised from $25 million to $100 million, which would increase the number of advisors under state supervision to 28%. Sources also say that Dodd’s bill will include a self-funding mechanism for the SEC.

David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington, points out that a self-funding mechanism for the SEC along with raising the $25 million level separating SEC-registered advisors with state registered ones are two ways to give the SEC “the resources it needs to do its job.” Raising the $25 million level to $100 million “would shift 4,200 SEC-registered investment advisors to state jurisdiction–thus reducing the total number of SEC-registered investment advisors by about 40%,” he says.

The Financial Planning Coalition–the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the CFP Board–has been the collaborative brainchild behind the idea of creating an entity that would regulate financial planners, and has been lobbying members of Congress for support. The independent oversight board under Kohl’s amendment would be housed within the SEC, and it would be up to the SEC to appoint members of the oversight board. CFP Board Chair Glovsky said that the SEC is “aware” of such an oversight board to regulate financial planners but “has some concerns about funding.”

Kohl’s proposed amendment would expand the definition of financial planner to include investment advisors and brokers and “anybody who holds himself out to the public as a financial planner” and provides advice with respect to the management of financial assets in not fewer than two areas of financial planning.

But Kohl’s proposal is running into opposition. Tittsworth of IAA says that his group has “expressed concerns that the financial planning coalition’s proposal should not subject investment advisors to additional regulation.” Moreover, Tittsworth says the IAA is “not aware of any gaps in the current regulatory framework governing investment advisors, many of whom perform additional services in addition to providing investment advice.”

Who’s Going to Pay for It?

It’s not surprising that the SEC has expressed concerns about funding for an independent oversight board, Fausti says, because establishing such an entity would require “expanding the SEC’s authority in an area where it lacks some expertise. The agency would need to add staff that fully understands all of the dimensions of financial planning that go beyond investment advice, and would also be required to stretch its existing resources in order to properly fulfill all of its obligations under Kohl’s amendment.”