ANALYSIS – Dodd bill takes pass on key U.S. broker reforms

March 24, 2010

By Helen Kearney

NEW YORK, March 23 (Reuters) – As Senator Christopher Dodd’s financial regulatory reform bill heads to the full Senate, brokerages for now have escaped tougher regulation thanks largely to fierce lobbying by insurers.

A bill approved by the Senate Banking Committee on Tuesday took a pass on two big issues affecting financial advisers — a uniform fiduciary standard for all professionals advising investors and rules that mandate brokerage customers take disputes to an industry arbitration panel.

While the terms of the legislation are likely to change during debate by the full Senate and when Rep. Barney Frank’s House Financial Services Committee weighs in, both issues for now will only be the subject of further study.

“The provision for another study is not warranted or wanted,” said Knut Rostad, chairman of the lobbying group Committee for the Fiduciary Standard.

Rostad, who is also regulatory and compliance officer at Falls Church, Virginia, investment advisory firm Rembert Pendleton Jackson, said he was disappointed Dodd’s committee only recommended that the Securities and Exchange Commission conduct a one-year study of the impact of a common fiduciary standard.

“We’re worried that by postponing action for one or two years, it will be very difficult to bring it back,” he said.

Rostad contends that committee members were swayed by aggressive lobbying by the insurance industry, which claimed a fiduciary standard would mean brokers could no longer charge commissions or recommend proprietary products — both of which could hurt sales of insurance products like annuities.

Financial advisers currently must abide by the fiduciary standard under the Investment Advisers Act of 1940, which requires them to act in the best interests of their clients.

Series 7-licensed registered representatives, stockbrokers who charge clients on a commission basis, by comparison must ensure that the products they recommend are “suitable.”

The issue has been muddied in recent years by a number of advisers who obtained both licenses, meaning they can act as an adviser with a fiduciary responsibility in some situations, or as a registered rep under the less strict suitability standard.

Further clouding the situation, almost every Wall Street firm now refers to its brokers as advisers, even though many of them are bound by the suitability standard.

A 2007 Rand Corp study revealed most clients do not understand the distinction between the two standards.

The fight for a common standard is far from over, said Neil Simon, a lobbyist for the Investment Adviser Association. The trade group intends to lobby members of the Senate and hopes the committee’s bill will be amended.

Simon points to a provision in the House bill that gives the SEC authority to extend the fiduciary duty to brokers.

“I’m hopeful (the House version) will pass,” he said.

The Securities Industry and Financial Markets Association, the brokerage industry’s main lobbying group, agrees there is a need for a uniform standard. It objected, though, to Dodd’s proposal to subject brokers to all provisions of the ’40 Act.

“We believe this is the best way to protect investors and end the patchwork system that currently exists,” a SIFMA spokesman said.

Investor groups had hoped that Dodd’s regulatory reforms also would tackle mandatory arbitration. As a matter of course, brokerage customers must agree to take any dispute to a FINRA arbitration panel rather than go through the court system.

Critics complain that the Financial Industry Regulatory Authority is controlled by Wall Street and historically has favored brokerages.

The Dodd bill delegates a decision on mandatory arbitration to the SEC and sets no deadline.

“We do not believe this needs to be studied any further,” said Brian Smiley, a former president of investor lobbying group the Public Investors Arbitration Association and a member of its board. “We believe the law should make an arbitration forum available for those who want it, but the court system should also be available.”

The Arbitration Fairness Act of 2009, introduced in the House 13 months ago, bans mandatory arbitration clauses in consumer disputes. The legislation appears to have stalled, Smiley said. (Reporting by Helen Kearney; Editing by Steve Orlofsky) ((Email:; Messaging:; 646-223-6124)) Keywords: FINANCIAL REGULATION/BROKERS

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