Standard Of Care Still Up In The Air

The language in the proposed amendment calls for the Securities and Exchange Commission to undertake a study designed to determine the proper obligations of brokers, dealers, investment advisers, and their associates in providing personalized investment advice about securities to retail customers.

Under the proposed amendment, the SEC would be required to provide a report to Congress within 18 months. The amendment would also give the agency the authority to impose new rules dealing with the issue, based on its findings.

But under the proposed amendment, the agency would be allowed to impose new rules only if they addressed regulatory gaps and overlaps in existing rules that the study identified.

The proposed amendment is coming under heavy fire from consumer groups as well as representatives of the financial advisor and financial planner industries.

Gohringer said that the amendment as circulated is only a working draft.

"There is no question that a solution needs to be found to put an end to the current confusion that exists between the standard of care imposed on broker-dealers and financial advisers," he said. "The disagreement is over what needs to be done, and Sen. Johnson is just searching for some common ground."

But he said it is too early to say what any final amendment on the issue would look like.

The language in the amendment is the same as that proposed by a coalition of insurance agent trade groups in a letter to Sen. Chris Dodd, D-Conn., chairman of the committee, and Sen. Richard Shelby, R-Ala., in a letter sent in December.

The issue is important because Sen. Dodd has indicated that he will unveil a proposed financial services reform bill by the end of the month and that the committee will start to work on it in early March.

The financial services reform bill passed by the House in December as well as the discussion draft of Dodd's bill both require that a fiduciary duty be extended to brokers.

Consumer groups, led by the Consumer Federation of America and Americans for Financial Reform, support the stronger fiduciary standard.

Insurance agents and brokers, as well as insurance underwriters, are lobbying to keep the current suitability standard.

Members of the financial planning industry met with staff members of the Senate Banking Committee today. The industry supports the tougher fiduciary standard. But Gohringer would not comment on what was discussed.

In preparation for the meeting, the CFA and AFR sent a letter to all members of the committee Tuesday voicing strong support for the strong language contained in legislation Sen. Dodd proposed in December.

The letter argued that, "in proposing a new study, the amendment gives scant attention to the issue of what investor protections should apply in these circumstances."

The letter added that the amendment avoids the words "fiduciary duty" and alleges that it "devotes more attention to the impact on brokers than to the impact on investors."

"The only investor 'concerns' to be addressed by the proposed study are taken directly from misleading industry talking points, which self-servingly suggest that raising the standard for brokers would result in increased costs or reduced investor choice," the letter said. "But we have several decades of experience from the financial planning industry to tell us that combining a fiduciary duty for advice with product sales to implement recommendations has no such ill effects. On the contrary, investors stand to see costs reduced dramatically if brokers are required, as they would be under a fiduciary duty, to take costs into account when making recommendations."