SEC to “Study” Fiduciary Issue

As I suspected all along, the House and Senate punted on the imposition of a fiduciary standard for all financial advisors. The financial reform bill has been renamed the Frank-Dodd Wall Street Reform and Consumer Protection Act of 2010 after House Financial Services Committee Chair Barney Frank (D-Mass.) and Senate Banking Committee Chair Christopher Dodd (D-Conn.). It calls on the Securities and Exchange Commission (SEC) to conduct a six month study of the issues surrounding the standards of care under which various financial advisors operate. Currently, stock brokers, insurance agents and other advisors operate under a “suitability” standard. Registered investment advisors must adhere to a “fiduciary” standard. [See my previous blog posts for an explanation of the differences in these two standards.]

The SEC must develop regulations that reflect the findings from this study. The bill’s provisions empower the SEC to impose the same “fiduciary” standard on broker-dealers that applies to registered investment advisers. Indeed, Representative Frank has indicated that he expects the SEC to do so. “We gave the SEC the power to do it,” said Mr. Frank from the House floor, “and they’re going to do it.”

We shall see. The bill must still pass in the Senate. With the recent passing of Senator Robert Byrd (D-West VA), that won’t happy until after the July 4th recess. There continues to be significant opposition to the bill in the Senate and it is not clear that the bill will pass as written.