As Investment Advisor went to press in mid-May, lobbyists and Congressional staffers were optimistic that the Senate would finish a vote on Senator Christopher Dodd’s (D-Connecticut; above, right) financial services reform bill by May 19. The final vote on the Senate bill will set into motion the next step on the road to financial services reform, which is for the Senate and the House to reconcile their bills.
As the days drew closer in mid-May for Senate Banking Committee Chairman Dodd and Senator Richard Shelby (R-Alabama; above, left), ranking GOP member on the Committee, to unveil their manager’s amendment–which includes the final list of amendments that Dodd and Shelby will indeed add to their bill–lobbyists and industry officials believed that very few of the 190 amendments that had been filed would actually find their way into the final bill. Washington observers expect that once the Senate bill passes, the Senate and House will have a goal of reconciling their bills before Congress’s July recess.
Of particular interest to the advisory profession, of course, is how the House and Senate will harmonize their two bills’ language regarding fiduciary duty–the House reform bill includes imposing a fiduciary standard on brokers, while the Senate bill does not. Since being reported out of the Senate Banking, Housing, and Urban Affairs Committee, Chairman Dodd’s bill has included Senator Tim Johnson (D-South Dakota) and Senator Mike Crapo’s (R-Idaho) provision (known as Section 913) requiring the Securities and Exchange Commission (SEC) to study, once again, the obligations of broker/dealers and investment advisors. The Johnson/Crapo provision replaced the original language in Dodd’s bill, which would have required brokers to adhere to a fiduciary standard of care.
Securities and Exchange Commission (SEC) Chairman Mary Schapiro has been imploring Dodd to make sure that the final financial services reform legislation gives the SEC the authority, at the end of the study that the Johnson/Crapo provision requests, to write a fiduciary standard for all financial services professionals. As Schapiro told Investment Advisor in a recent interview: “At the end of that study, we need the authority to go ahead and take action. [The legislation] doesn’t give us that authority. That’s the real flaw from our perspective….The bill needs to give us the ability to create the fiduciary standard of conduct for all professionals at the conclusion of the study, and that’s the piece that’s so critical that’s missing.”
A Recurring Theme
Before debate began in the full Senate on Dodd’s bill, Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-New Jersey) introduced a fiduciary amendment that would replace Section 913 of Dodd’s reform bill, the Restoring American Financial Stability Act, with the House reform bill’s provision requiring brokers to adhere to a fiduciary duty. Since the Senate debate began, the SEC filed fraud charges against Goldman Sachs on April 16, alleging that Goldman engaged in fraud in building and selling collateralized debt obligations (CDOs) tied to subprime residential mortgages. Congress held a series of hearings after the SEC filed its suit, and grilled Goldman execs; one issue that came to the fore during those hearings was Goldman’s apparent lack of adherence to a fiduciary standard, albeit a fiduciary duty at the institutional level. This sparked a rash of fiduciary amendments to Dodd’s bill. Senator Richard Durbin (D-Illinois), Chairman of the Senate Appropriations Subcommittee on Financial Services, joined as a cosigner to the Akaka/Menendez amendment after the series of Goldman hearings.
Another member of the Senate Subcommittee on Financial Services, Susan Collins (D-Maine), told SEC Chairman Mary Schapiro during her testimony on April 28 that Goldman executives did, indeed, “dance around” the fiduciary-related questions that were posed to them. Collins then asked Schapiro if a fiduciary duty should apply to brokers. Schapiro replied: “It absolutely should.” Soon after the series of Goldman hearings, Collins announced that she would craft her own fiduciary amendment to add to Dodd’s bill.
Senator Arlen Specter (D-Pennsylvania) also put forth an amendment to Dodd’s bill regarding fiduciary duty, but his amendment “would impose a fiduciary duty on brokers in almost all cases, so it’s not just tied to investment advice,” points out David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington. “That goes well beyond what we [IAA] or the [Obama] Administration or other groups that have been supporting extending the fiduciary duty have talked about.” Senator Barbara Boxer (D-California) is yet another senator who joined the fiduciary amendment bandwagon.