Johnson amendment gains primacy as jockeying continues on the Hill

February 25, 2010 — 10:56 PM UTC by Sara Hansard


Securities and Exchange Commission member Elisse Walter today suggested a simplified approach to harmonizing regulations of investment advisors and broker-dealers that would call for advisors and broker-deals to pledge “to always act in good faith, and in the best interest of my client, and will act as a fiduciary.”

“We’ve been making it too hard on ourselves,” in trying to determine how to apply fiduciary standards to broker-dealers, she said in a speech at the at the Investment Adviser Association’s annual compliance conference in Arlington, Va.

Walter said she took her suggested language on the pledge from a recent New York Times blog reporter (she didn’t say who it was). She also suggested that financial professionals would be obliged to provide written disclosure in advance of conflicts of interest, as well as disclosure of fees they receive from transactions and fees paid by to others for getting client referrals.

Walter’s speech is significant in light of the jockeying on Capitol Hill, where the future of financial services reform legislation is still a big question. Walter suggested that the SEC could step up to the plate and take on the task of harmonizing regulations itself.

Amendment would leave more decision-making to SEC

The latest news from the Hill came today, when it became clear that a proposal called for by Senate Banking Committee Chairman Christopher Dodd, D-Conn., in draft legislation released last November, is likely to be replaced by an amendment authored by Sen. Tim Johnson, D-S.D., according to sources. Johnson’s amendment calls for an SEC study and rulemaking on harmonizing broker-adviser regulations.

While Walter said she did not believe the original Dodd approach would be workable, she also spoke out against conducting another study of adviser regulation. “I question whether that approach would be helpful,” she said, noting that the RAND Corp. as already conducted a study in 2008 concluding that investors are confused about the difference in regulations between advisers and brokers. “Another study may simply duplicate that effort and delay reform in this important area,” Walter said.

Draft legislation released last November by Senate Banking Committee Chairman Christopher Dodd, D-Conn., would have deleted the “broker-dealer exception” from the Investment Advisers Act of 1940, which would have required brokers giving advice to be subject to fiduciary requirements and other regulations of the law. The Advisers Act, the primary law governing investment advisers, exempts broker-dealers who provide investment advice that is solely incidental to their other services and who receive no special compensation for the advice from having to register as investment advisers.

Unfair to broker-dealers

Subjecting broker-dealers to the Exchange Act, SRO rules and the Advisers Act could result in “unduly tilting the competitive playing field against them,” Walter said.

Provisions in legislation approved last December by the House of Representatives would require the SEC to adopt rules requiring that the standard of conduct for financial professionals giving personalized investment advice about securities to retail customers would be to act in the best interest of the customer without regard to the interests of the professional. The House bill also stipulates that the standards be no less stringent than standards applicable to investment advisers.

Walter called for “a legislative approach harmonizing the [brokerage and investment adviser] regimes on a more comprehensive scale, and taking into account the strengths and weaknesses of both.”

Legislative suicide

David Tittsworth, executive director of the IAA, said at the conference that he is still betting on some form of legislation to pass. But, he said, Dodd must garner some Republican support – and so far, it’s not clear he has it.

“It would be suicide to bring a bill to the floor without it,” Tittsworth said.

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