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September 01, 2010 at 08:00 PM
Now that The Dodd-Frank Wall Street Reform and Consumer Protection Act has been signed into law, the media dissection of the 2,300-plus-page bill is well underway. One theme recurring in many analyses is that rather than reforming the nation’s financial regulation, Dodd-Frank has vastly increased the powers of the same regulators who oversaw the mortgage meltdown in the first place, namely The Federal Reserve, the Department of the Treasury, and the Securities and Exchange Commission.
As a June 28 Op/Ed piece in The Wall Street Journal put it: “The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.”
Of particular interest to the retail financial advisory corner of the world is the mandate given to the SEC. At the conclusion of some 20 directed studies, the Commission has the authority to potentially write 95 or so new rules, including, as stated in Section 913, “…rules to provide that, with respect to a broker or dealer, when providing personalized investment advice about securities to a retail customer, the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment advisor under section 21 of the Investment Advisers Act of 1940.”
Can this really mean that the most sweeping reform of financial advice to consumers in the history of our Republic will be left entirely to the discretion of the SEC? That’s the way I read it, and I’m far from being alone. As advisor, attorney, and NAPFA board member Ron Rhoades wrote in a response to my July 26 blog on InvestmentAdvisor.com: “The Dodd-Frank Act likely provides enough authority to the SEC to both raise the standards of conduct for B/Ds and/or lower the standards of conduct for RIAs.”
The Opportunity to Influence
Many of us who support a fiduciary standard for everyone who offers financial advice to the public were openly disappointed by this Congressional handoff to the SEC. Yet there might be a silver lining in Congress’s not-so-surprising willingness to pass the buck on such a crucial–and controversial–issue. We now have an unprecedented opportunity to influence such a sweeping reform. “What is most notable about this new era,” wrote the folks at Fi360 in their July 28 blog, “is the opportunity for the public to provide input that could shape new regulations.”
You’re probably way ahead of me on this, but unfortunately, that “input” isn’t limited to just the public. As you might imagine, as I write this column, laptops at financial industry lobbying firms all over Washington are undoubtedly overheating in their efforts to crank out well-researched, seemingly well-supported, and oh-so-persuasive tomes designed to marginalize or neuter a fiduciary standard for brokers. Lamented Rhoades: “Do we modify the fiduciary standard to fit B/D practices, or do we modify practices to fit the law? [...] I tend to be pessimistic, having seen the vast influence moneyed interests possess over both Congress and many of the agencies of our government. I foresee the gradual erosion of the fiduciary standard.”
I tend to be more optimistic. Based on many comments made over the past year, SEC Chairman Mary Schapiro and the other four Commissioners seem to believe that the time has come for a real fiduciary standard for brokers who provide advice to the public. Dodd-Frank has given them the opportunity to do the right thing–and make history. But they’re going to need help in resisting the seductive pressure the financial and insurance firms will exert to maintain the status quo of the current, very lucrative, sales-oriented industry.
What You Should Do
