Reform becomes law as questions abound

The sweeping financial-regulatory-reform legislation that President Barack Obama will sign this week represents anything but closure for Wall Street. Mr. Obama's pen stroke will usher in a long period of uncertainty in which wary industry professionals will monitor — and try to influence — how federal agencies conduct the hundreds of studies and rules mandated by the 2,300-page legislation. “There is no question the world is going to change,” Charles Johnston, president of Morgan Stanley Smith Barney LLC, said at a Securities Industry and Financial Markets Association meeting on the reform bill last week in New York. “The question is, how much is it going to change?” One of the most important facets of the legislation to Mr. Johnston, as well as to advisers, is a provision that gives the Securities and Exchange Commission the authority to promulgate a regulation setting a universal fiduciary duty for investment advice provided to retail customers. Before making that decision, the SEC must complete a study within six months that assesses gaps in the oversight of investment advisers — who must act in the best interests of clients and disclose material conflicts of interest — and broker-dealers and their reps, who must ensure that an investment is suitable to the needs of a client.

UNIVERSAL STANDARD

Advocates said that imposing a fiduciary duty on all investment advice will better protect consumers. Broker-dealer groups insist that they're not opposed to a universal standard but are concerned that if not written carefully, such a standard may impinge on practices at the heart of their business, such as principal trading. With financial reform set to become law, the debate is no longer theoretical. “For anybody to have said 15 months ago that today we would be facing SEC rulemaking on brokers' needing a fiduciary standard, no one would have believed you,” said Knut Rostad, chairman of the Committee for the Fiduciary Standard. Regulators are now in the spotlight because the Senate approved the reform bill 60-39 on July 15. The vote culminated a concerted effort by Democratic leaders to secure enough Republican support to reach the 60-vote threshold to overcome a filibuster. In the end, three of 41 Senate Republicans voted for the final bill, which was the product of two weeks of House-Senate negotiations to merge competing versions of reform. The House passed the bill 237-192 on June 30 with only three Republicans in the “yes” column.

MASSIVE OVERHAUL

The measure affects the entire financial industry, introducing new curbs on systemic risk, bolstering capital requirements, strengthening regulation of derivatives and establishing a consumer protection agency, among scores of other provisions. Mr. Obama said the legislation will “protect consumers and lay the foundation for a stronger and safer financial system — one that is innovative, creative, competitive and far less prone to panic and collapse.” Most GOP members of Congress denounced the measure, saying it would create massive new bureaucracies, raise costs and crimp credit, while failing to reform mortgage lending, a primary cause of the financial meltdown. What is not debatable is that it gives the SEC an overflowing agenda. The measure requires the agency to take 124 actions to implement portions of the bill. Robert Cook, director of the SEC's Division of Trading and Markets, said that the fiduciary study will be one of the first items addressed. The review requires the SEC to evaluate 14 dimensions of the issue. “We expect that to move forward quickly,” Mr. Cook said at the SIFMA conference. “An endeavor of this scale would be a commissionwide effort.” Groups on both sides of the fiduciary tussle are gearing up to try to influence the SEC. “We're getting ourselves very organized to be one of the principal content providers to the government agencies who have to make these decisions,” said Tim Ryan, SIFMA's president and chief executive. E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.