The fiduciary standard's next step

House and Senate negotiators last week hit an impasse that may be resolved as early as tomorrow on the fiduciary duty provision embedded in the massive financial regulatory reform bill. The House side is insisting that its approach, which would direct the Securities and Exchange Commission to impose a universal standard of care on anyone providing personalized investment advice to retail customers, be included in the final bill. The provision would require broker-dealers and insurance agents to act in the best interests of their clients and disclose conflicts of interest — the same standard that registered investment advisers must meet. By contrast, the Senate version calls for the SEC to study the issue. Although the Senate bill would authorize the SEC to proceed to writing regulations after it completed a study, the regulator could only do so under its existing authority. That authority wouldn't allow the commission to implement a universal fiduciary standard, critics claim. At a meeting of the House-Senate conference committee last week, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, called the fiduciary duty “essential to protecting investors, which is at the center of what we're trying to do.” During a conference, the House makes an offer, and the Senate responds. Then the House reacts and so on until consensus is reached. Mr. Frank, who is chairman of the conference, and his House colleagues last Wednesday put forth their offer on the fiduciary language — telling senators sitting across the table that they want to replace the Senate language, which is already in the 1,974-page text that is the basis for the negotiation, with the House provision. Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, indicated last Thursday that the Senate wasn't ready to respond with a counteroffer. “We're going to still need a few more days,” he said. “Fiduciary responsibility is very important to us,” Mr. Frank said. “We may come back with a counter-counteroffer.” One fiduciary advocate said that she doesn't know what is causing the Senate delay or what form its counteroffer may take. “This is a highly contentious issue with fierce industry opposition,” Denise Voigt Crawford, Texas securities commissioner and president of the North American Securities Administrators Association, said in a statement. “I believe the public and many members of Congress understand the logic of our argument,” she said. “But on the Hill, we are competing against a well-funded army of lobbyists.” In addition, the fiduciary provision is one of only a handful of changes to the investor protection title of the legislation that are in dispute. The conference committee is expected to continue work on the bill for the next week or so. Looming ahead for House and Senate negotiators are much more controversial sections, such as those dealing with derivatives, proprietary trading and the so-called too-big-to-fail problem. The bicameral conference committee has brought together 43 House members and senators to reconcile their differing versions of the overhaul into one bill that both chambers can pass. If the compromise legislation passes, the bill will be sent to President Barack Obama to sign into law. Democratic leaders want to get the measure on the president's desk by July 4. It's unclear whether that deadline will be met. A genuine conference like the one being undertaken on financial industry regulatory reform has become uncommon on Capitol Hill. The conference met from late morning until early evening for several days last week. That schedule is likely to lengthen over the course of this week. The proceedings sometimes bog down in political bickering. Sometimes members are confused — or bemused — about the amorphous conference procedure as they wade through the mountain of paper representing the base text. Prior to the conference, observers following the fiduciary provision thought that it might be overwhelmed by other larger issues. But House members are fighting for their side's stronger fiduciary language. “It seems to me this is long overdue,” said Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services subcommittee on capital markets. “There's no reason to delay.” Currently, broker-dealers have to meet a suitability standard, which means that products they sell must be appropriate for a client's investment goals. Fiduciary advocates assert that the suitability rule leaves too many loopholes for investment representatives, who may saddle investors with costly but poor-performing products. But others consider the House proposal to be legislative overkill. Broker-dealer and insurance industry associations argue that a fiduciary standard would hamstring broker-dealers, threatening their ability to charge commissions and offer proprietary products, and raise costs and limit choices for investors. Their fears were expressed on the conference committee by Rep. Jeb Hensarling, R-Texas. He asserted that applying a universal fiduciary standard might threaten such discount broker-dealers as Charles Schwab & Co. Inc., which he credits with “democratizing access to the financial markets in ways we have never seen before.” Mr. Hensarling worries that $5 and $10 trades could double in price if the broker-dealer business model is saddled with a universal fiduciary standard. “I'm fearful that rhetoric that may be aimed at Wall Street unfortunately ends up hurting Main Street investors,” Mr. Hensarling said. But Mr. Kanjorski said the House bill would not prevent broker-dealers from charging commissions, would not limit the sale of proprietary products and would not impose a continuing duty of care after a broker-dealer rep provides investment advice related to a particular sale. The Senate side will now have to respond to the House. “We've been having conversations on the matter for the last couple days,” Mr. Dodd told reporters Wed- nesday. “It's a complicated matter.” E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.