Enactment of financial services reform legislation by Memorial Day appears to be the new goal of Congress.
In the latest development, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, says he is working through the two-week Easter recess period with Republicans in hopes of crafting bipartisan legislation that will move through the Senate sometime this month.
Moreover, in comments on the heels of the passage of health care reform legislation after 15 months of effort, House Speaker Nancy Pelosi, D-Cal., said Democrats are determined to complete an overhaul of the financial sector’s regulatory framework with or without the support of Republicans.
The comments were made as the insurance industry won two key changes in the version of financial services reform legislation that was reported out by the Senate Banking Committee on March 22 and sent to the Senate floor.
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The bill passed the committee by a party-line, 13-10 vote.
At the same time, a Securities and Exchange Commissioner said in remarks at an investment conference on March 26 that Congress should take another look at harmonizing the standards agents and brokers must use in selling investment products.
The House bill contains such a provision, albeit with a safe harbor for sale of some products sold by agents and brokers, but similar language in the Dodd bill has been replaced by a provision calling for a study of the issue by the SEC.
Regarding the other key change, creating a financial planning oversight board, the revised Senate bill mandates that the Government Accountability Office study the effectiveness of state and federal regulations to protect consumers from misleading financial advisor designations; current state and federal oversight structure and regulations for financial planners; and legal or regulatory gaps in the regulation of financial planners and other individuals who provide or offer to provide financial planning services to consumers.
Under the bill, the GAO would have to report back to Congress within six months of the date of enactment of the bill.
These studies represent a compromise from an amendment proposed by Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee, to establish a “standard of care” for sale of investment products and create a financial planning oversight board.
The life insurance industry, both companies and agents, strongly opposed such a provision, fearing that it was a back-door way to impose a uniform fiduciary standard in sale of investment products.
But the compromise drew fire from a SEC member. “This potential retreat from requiring a fiduciary standard for all who provide investment advice concerns me for several reasons,” said Luis A. Aguilar, a SEC commissioner.
First, he said he sees “no need” to study the appropriate obligation for investment advisors. “We already have a strong, workable standard that has done its job successfully for decades, and I would not support any attempt to weaken it.”
“I don’t believe that we need a study to conclude that investor protection requires that broker-dealers providing investment advice be subject to fiduciary duties,” Aguilar said. “I think that question has long ago been asked and answered.”
He also said the SEC is adding inspectors in order to strengthen compliance with the fiduciary standard.
Second, as with the House bill, Aguilar said he “questions” why the protection of the fiduciary standard should be limited to “retail” customers. “It is readily apparent from recent SEC enforcement cases involving auction rate securities that all investors, including institutional investors, need the protection of the fiduciary standard.”
He also said he was concerned about why the Senate bill, which calls for a study, as well as the reach of the House bill, should be limited to “personalized services.”
“This qualification would narrow the range of clients that would be protected by the fiduciary standard, and I fear that it may become a loophole that would make it easy to avoid putting clients first,” he said.