SEC study gains upper hand in fiduciary-standard battle

When Capitol Hill negotiations on landmark financial-regulatory-reform legislation begin in earnest this week, proponents of putting a universal fiduciary standard in the final bill must overcome a head start that backers of a weaker provision have gained. The House bill directs the Securities and Exchange Commission to write a rule imposing the same standard of care on broker-dealers and insurance agents that applies to investment advisers when giving personalized investment advice. The Senate bill would delay such a regulation until after congressional review of an SEC study. The Senate language, which fiduciary advocates oppose, is starting in the pole position as talks get under way. “We understand that the base text that will be used in the conference is the Senate bill text,” said David Bellaire, general counsel and director of government affairs for the Financial Services Institute, which supports the push for a study. “That creates a slight advantage for the Senate provision to remain in place.” The House-Senate conference committee will reconcile the versions of the bill passed by each chamber — the Senate last month and the House last year. After Congress approves a final bill, it will be sent to President Barack Obama to be signed into law. Democratic leaders want to get the legislation on the president's desk by July 4. That puts a tight time frame on negotiators, who will have to address many differences — some of them major — in a bill that totals more than 1,500 pages. Throughout the legislative process, the fiduciary standard has been overshadowed by larger issues such as curbing excesses by “too big to fail” institutions, establishing a consumer protection agency, reforming derivatives trading and addressing systemic risk. During consideration of the financial-reform bill last month on the Senate floor, fiduciary amendments never came up for a vote. The lack of attention to the issue is likely to carry through to the conference. While negotiators wrestle with derivatives policy, for instance, they will want to resolve other differences quickly. Having the Senate language in place at the start makes it easier for conference members to sign off on that provision rather than replace it with the House proposal. “I see the issue of fiduciary standards being one of those bargaining chips that can be bargained away,” said Kristina Fausti, director of legal and regulatory affairs at Fiduciary360 LLC. It is too early to tell whether the House or Senate provision will prevail, observers said. There are additional factors, however, weighing in favor of the Senate approach. The two sponsors of the SEC study, Sens. Michael Crapo, R-Idaho, and Tim Johnson, D-S.D., are among the Senate negotiators. Although Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, bowed to a request from Mr. Johnson to replace a much stronger fiduciary provision in his original bill with the SEC study, Mr. Dodd will still play a central role in shaping the final bill. The conference committee's chairman will be Rep. Barney Frank, D-Mass., who is chairman of the House Financial Services Committee. House Speaker Nancy Pelosi will appoint other House members this week. Presumably, Mr. Frank will advocate for the House fiduciary provision. A spokesman for him declined to comment. Although Congress was out of session last week, the silence on the fiduciary issue concerns its backers. “It's somewhat troubling that we haven't seen anyone jump up and be the champion for the fiduciary standard,” said Blaine F. Aikin, chief executive of Fiduciary360. “It's been awfully quiet for the last week or so.” Some of the conference committee's latitude to incorporate House proposals is constrained by the need to attain a filibuster-proof 60 Senate votes. “We have our work cut out for us,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “I am hopeful we will get the House language or nothing,” she said. “The Senate language is worse than no language.” Ms. Roper and her allies argue that the fiduciary standard has already been studied and that the SEC review is a delaying tactic that threatens a regulation. “They're going to study this thing to death,” said Jacob Zamansky, founder of Zamansky & Associates, a law firm that represents investors. “I have no faith in Congress' standing up to the Wall Street lobbyists.” The House bill instructs the SEC to write a rule that requires broker-dealers to meet the same standard as investment advisers when providing personalized investment advice — obligating them to act in the best interests of their retail clients and to disclose conflicts of interest. The broker-dealers and the insurance community argue that their representatives already have to adhere to rigorous regulations and that applying a fiduciary standard to them might prohibit them from charging commissions or limit the products that they can sell. Mr. Bellaire said that his organization doesn't oppose harmonizing regulations. However, it is a “complicated issue” that demands a careful review, he said. “We want a universal standard of care, but it must be done right,” Mr. Bellaire said. “This study offers the best opportunity to do that,” he said. “It's essential to achieving a solution that protects investors without driving up the cost of doing business so that some investors lose access to professional advice and support.” Fiduciary advocates counter that the House bill wouldn't raise costs or curtail the sale of proprietary products. They say it is essential to protecting investors. “A fiduciary standard is what requires the investor's interests to be placed first,” Mr. Aikin said. “It is indisputable that the fiduciary standard is a prerequisite for trust.” What isn't clear is whether the issue will become a priority for Capitol Hill negotiators. E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.