Senator Tim Johnson (D-South Dakota) offered House conferees a compromise Tuesday night, June 22, regarding putting brokers under a fiduciary standard of care by retaining the Senate’s call for an SEC study of advisor and broker obligations to retail investors but added giving the SEC the authority to write a universal fiduciary standard at the end of that study. The Senate compromise is still being negotiated, however, and while the House has yet to fully accept it, House Financial Services Chairman Barney Frank said in the early Thursday morning debate that the “House acquiesces to the Senate study” with some modifications. The last day of the conference is Thursday, June 24.
Barbara Roper, director of consumer protection for the Consumer Federation of America (CFA), who’s just one proponent of the House’s original language calling for a fiduciary mandate for brokers, argues that Johnson’s compromise “gives the allusion that the SEC would be authorized to act” on instituting a fiduciary standard for brokers. Johnson’s compromise, she says, “puts such impossible barriers in [the SEC's] way that if they [the SEC] tried to adopt [fiduciary] rules they’d be tied up in court and probably lose.”
Johnson’s compromise, Roper continues, does not apply the House’s language calling for a fiduciary duty for brokers, but instead uses “in the client’s best interest.” So it directs the SEC “toward adopting a lower standard for brokers than applies to advisors, perpetuating the problem we’re trying to solve.”
Kristina Fausti, director of regulatory affairs for Fiduciary 360 (fi360), agrees that under Johnson’s compromise “there is definitely a high threshold for the SEC to overcome in order for it to be able to create a fiduciary standard for broker/dealers.” In addition, she says, “while it appears as though the Senate’s proposal would allow the SEC to adopt a ‘best interest of the customer’ standard for broker/dealers (assuming the SEC meets the thresholds for engaging in rulemaking), it also appears that the Senate’s language would provide the SEC a lot more latitude to define and apply the broker/dealer standard of care differently than the one for investment advisors even though advisors would also be held to a ‘best interest of the customer’ standard.”
The way the language is written in Johnson’s compromise, Fausti says, “it makes the SEC rulemaking and enforcement authority under the Exchange Act of 1934 and Investment Advisers Act of 1940 completely independent of each other, so we would still be left with two separate and distinct regimes and standards for broker/dealers and investment advisors.”
But Dale Brown, president and CEO of the Financial Services Institute (FSI), says that FSI “respectfully disagrees with those who insist on calling the study anti-consumer. On the contrary, a comprehensive study will avoid a rush to judgment and the serious unintended consequence of limiting access to quality and affordable advice. Senator Johnson continues to provide steady, reasoned leadership on this very important issue.”