Showdown set over whether RIAs stay under regulatory authority of the SEC [Updated!]

UPDATE: Elizabeth sent me a quick rundown from her notes after leaving today’s hearing. Here is the text of her e-mail to me: “Everyone acknowledged that the fiduciary standard is better. It’s still unclear the extent to which the legislation will define the fiduciary standard, require the SEC to promulgate new regulations on how the fiduciary standard applies, or amend the act of 1940.State regulators are proposing to regulate RIAs of up to $100 million in assets under management. That idea found favor on the committe. The advocates for RIAs and investors spoke in favor of leaving regulation with the SEC and largely stayed silent on the question of how the SEC ought to be reformed. SIFMA made a pitch for legislation that would make it difficult for investors to due under state common law standards. That provided one of the moments of tension in the room. There is a strong movement — accepted by the IAA — to impose user fees to fund more enforcement at the SEC. The conversation was still being driven a lot by Bernie Madoff.” FULL STORY LATER TODAY

The drama unfolds today [Tuesday] in 2128 Rayburn House Office building, and I plan to be there. I expect this hearing of the House Financial Services Committee to have the contained ethical and cultural conflict of an Ibsen play.

SIFMA, the Securities Industry and Financial Markets Association, plans to present its version of the fiduciary standard at the hearing, in response to draft Investor Protection legislation released last week.

This is the moment that RIAs who favor the existing fiduciary standard have been waiting for all summer. Since SIFMA announced that it supported the fiduciary standard, the two key questions have become: What ideas will SIFMA put forward, and to what extent will new legislation adopt SIFMA’s language – or anyone else’s language, for that matter?

It’s clear from the prepared testimony that sparks will fly between SIFMA and some of the other organizations represented, including the Investment Adviser Association.

Also at issue is the question of what body will regulate investment advisors and broker-dealers.

With Richard Ketchum, the Financial Industry Regulatory Authority chairman, set to testify, that issue will also be front and center. Ought regulation of RIAs and broker-dealers to fall under the much-criticized FINRA, to stay under the direct gaze of the SEC, or to be placed into the jurisdiction of a new body, perhaps even one overseen by the industry?

The most compelling issue, however, is certainly the fiduciary standard. Quite simply, it’s hard to imagine how Wall Street’s centuries-old business model could be adapted to fit within the fiduciary standard. Broker-dealers and life insurers, which form the center of the nation’s powerful financial services industry, make money by selling products.

Investment advisers, far fewer in number, sell a service for a fee. Broker-dealers thrive on speed and risk-taking; caution and disclosure lie at the heart of the fiduciary standard under which investment advisers operate.

So the question on my mind is whether I will really see elements of a serious attempt tomorrow to change Wall Street’s culture, at least regarding broker-dealers interactions with individuals? The times are just historic enough to think that it’s possible.

Such things are better seen in person, and are worth the price of a metro ride. So, though it’s easier to watch a Congressional hearing online (https://www.house.gov/apps/list/hearing/financialsvcs_dem/hr_092909.shtml), I’ll be joining the line at 9:30 tomorrow morning outside the hearing room and I’ll file a full report with analysis later in the day here at RIABiz.

Witnesses on tap tomorrow for the Investor Protection Act portion of the hearing:

Ms. Denise Voigt Crawford, Texas Securities Commissioner, Securities Administrators Board, on behalf of North American Securities Administrators Association

Mr. Richard Ketchum, Chairman and CEO, Financial Industry Regulatory Authority

Mr. Mercer E. Bullard, Founder and President, Fund Democracy, Inc.

Mr. John Taft, Head of Wealth Management, RBC Wealth Management, on behalf of Securities Industry and Financial Markets Association

Mr. David G. Tittsworth, Executive Director, Investment Adviser Association

Mr. Bruce W. Maisel, Vice President and Managing Counsel, General Counsel’s Office, Thrivent Financial for Lutherans, on behalf of the American Council of Life Insurers