An amendment floated last week by Sens. Arlen Specter, D-Pa., and Ted Kaufman, D-Del., that would impose criminal penalties on broker-dealers for violating fiduciary standards is giving the senators a way to vent frustration with Wall Street.
An amendment floated last week by Sens. Arlen Specter, D-Pa., and Ted Kaufman, D-Del., that would impose criminal penalties on broker-dealers for violating fiduciary standards is giving the senators a way to vent frustration with Wall Street.
What's not clear, however, is the viability of the amendment.
After weeks of delay getting the bill to the floor, and then further stalling over proceeding to the amendment stage, the Senate last Wednesday began voting on additions and changes to a comprehensive bill on financial regulatory reform. It dealt first with a provision addressing the collapse of financial institutions and moved on to grappling with a consumer protection agency and other controversial issues.
It's difficult to tell when fiduciary-standards amendments will come up or how much support there will be for them.
“Everything is in flux,” said an aide for Mr. Specter who was not authorized to speak on the record. “We're not sure what amendments will be taken up or how.”
A major complicating factor is that the 41 Senate Republicans might insist that some amendments garner 60 votes for passage. That's why Sen. Susan Collins, R-Maine, caused a stir two weeks ago when she indicated that she favors applying a fiduciary standard to broker-dealers.
The House financial-reform bill, approved in December, would direct the Securities and Exchange Commission to write a regulation that would apply the same fiduciary standard to broker-dealers that is imposed on registered investment advisers.
The Specter-Kaufman amendment would extend the fiduciary duty to institutional clients and impose criminal penalties on broker-dealers for willful violations of the high standard of care.
Ms. Collins also is drafting an amendment, but the language has not been finalized, according to an aide. Her interest is clearly giving the issue momentum.
“When you have a Republican, it changes the dynamic,” said Gary Kalman, director of the federal legislative office of the U.S. PIRG, a federation of state public interest research groups. Nonetheless, Mr. Kalman predicts that it will be tough to strengthen the fiduciary-standards provision in the Senate bill, which merely calls for an SEC study of the issue.
“This is going to be one of the issues there will be a significant fight over,” he said. “The broker-dealers have been very outspoken on the Hill.”
Sen. Richard Shelby, R-Ala., the ranking member of the Senate Banking Committee, was circumspect about the level of support in his caucus for a fiduciary standard.
“We believe that we should look at the broker-dealers,” Mr. Shelby said. “But we haven't satisfied everything yet.”
Sen. Robert Menendez, D-N.J., said he has had discussions with Ms. Collins about an amendment that he and Sen. Daniel Akaka, D-Hawaii, have written that would replace the Senate provision on an SEC study with the House language telling the SEC to write a fiduciary-standard regulation for broker-dealers.
Mr. Menendez said that Ms. Collins is interested in a more streamlined provision.
“We're in conversations with her about what kind of narrowing she is talking about,” he said.
Mr. Menendez said he favors a common-sense approach in which a broker-dealer client can expect to get advice that is in his or her best interests.
“I think that's what we're doing, and I think it has a lot of currency on the floor,” he said.
Meanwhile, Ms. Collins is weighing the effect of any kind of amendment, according to an aide.
“She is considering language that would make it clear that large investment banks have a legal duty to act in the best interests of their clients, similar to the fiduciary standard that applies to financial advisers,” said Kevin Kelley, a spokesman for Ms. Collins. “She wants to strike the right balance, however, and ensure that such language does not apply to anyone who sells any kind of financial product, which she believes is too broad an approach.”
A lawyer who represents broker-dealers has doubts about whether the most stringent idea — Mr. Specter's call for criminal penalties for fiduciary violations — can be fair and effective.
“A fiduciary standard is by its nature a very high standard of conduct,” said Mark Costley, a partner at Drinker Biddle & Reath LLP. “To attach criminal liability to someone who fails to meet that high standard doesn't seem reasonable.”
In addition, the criminal penalties should apply to investment advisers and banks as well, Mr. Costley said.
“As a matter of fundamental fairness, it ought to apply to all fiduciaries, which would make implementation of [the regulation] much more complex,” Mr. Costley said.
E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.
