Regulatory Wire: Do Fiduciary advocates now have the Obama faction on their side? Treasury speech offers hope.

Brooke’s Note: Maybe this really is a good sign for fiduciary advocates. Two groups known for enjoying their perch above the fray — family offices and the Obama administration — have entered the fray. For someone like me observing from beyond the frame in California, these developments seem more than interesting.

Where doe the administration stand in the fiduciary standard?

Is the Obama administration officially coming down in favor of fiduciary reform? Perhaps, though how much of a priority the administration makes lobbying for it during the reconciliation process that started this week is in question.

The White House support for fiduciary formally comes from a U.S. Treasury Dept. memo from Deputy Treasury Secretary Neal Wolin released last week. Said Wolin in a speech in front of the FINRA national conference on May 27, “We believe that retail brokers offering investment advice should be subject to the same fiduciary standard of care as investment advisors, and we will work to include that provision in the final bill. Clients receiving investment advice don’t distinguish between broker/dealers and investment advisors and neither should the law.”

Some observers are taking the memo as a sign that the administration is advocating for the standard as the House and Senate bills are reconciled. Political leaders are saying that the bill may be on the president’s desk by the July 4 recess.

The Committee for the Fiduciary Standard certainly took note of the memo, highlighting it in press release it sent out on family office support for the fiduciary standard. (see next item).

That the issue of the fiduciary standard was included in this year’s reform debate was most likely due to a white paper issued by the Treasury Department last summer.

Family office advisors on reform: Get it done

Fiduciary reform advocates are working overtime to gather as much industry support as possible for a uniform financial advisory standard.

The latest example of that effort is an announcement from the Committee for the Fiduciary Standard that has 10 prominent U.S. financial advisors signing the group’s “Fiduciary Statement” that calls for the fiduciary standard established under the Investment Advisers Act of 1940 and affirmed by the Supreme Court, to be included in Wall Street reform legislation.

Other signatories say that financial consumers need to recognize how important uniform standards are – and that their personal financial situation may well depend on it. “Investors need to understand the important differences between advisors and brokers who meet the fiduciary standard versus those who only meet the minimum requirements of the suitability or commercial sales standard. Most fundamentally, fiduciaries are hired to represent investors, while those following the suitability standard are permitted to represent their firms’ interests, first. This is a huge difference,” said Gregory Curtis, Chairman of Greycourt & Co., Inc.

According to the Committee, the 10 family office firms which have signed the Fiduciary Statement are:

David Basner
President
TAG Associates, LLC

Gregory Curtis
Chairman
Greycourt & Company, Inc.

Sara Hamiliton
Founder & Chief Executive Officer
Family Office Exchange

Maria Elena Lagomasino
Chief Executive Officer
GenSpring Family Offices

John LaPann
President & Chief Investment Officer
Federal Street Advisors, Inc

Ed Lazar
President
Threshold Group, LLC

Thomas R. Livergood
Chief Executive Officer
Family Wealth Alliance, LLC

Charles J. Maxwell
Chairman & CEO
Meristem

Carol Pepper
Founder & CEO
Pepper International
Steve Prostano
President
Silver Bridge Advisors

Insurance group on financial reform: Keep us out of it

For months, RIBiz has been hearing that the insurance industry was one of the most active in lobbying against reform that would impose the fiduciary standard on investment advice. This week, the American Council of Life Insurers (ACLI) weighed in, in public.

Frank Keating, the Council’s president and CEO, sent a letter to the 43 Congressional leaders reconciling the U.S. House and Senate versions of financial reform.

It’s not exactly a surprise that the insurance group is expressing “concern” over provisions in the proposed legislation that could force insurance agents to act on the same fiduciary level as financial advisors.

This is the delicate way that Keating states that case, particularly on how the legislation may put insurers on the same risk management regulatory level as banks.

“Both bills contain regulatory provisions that appear to be designed for banks, but would nonetheless also apply to life insurers. These bank-centered provisions, when applied to life insurers, could have the perverse effect of exposing life insurers and their policyholders to increased financial risk, rather than mitigating that risk,” Keating said.

“The life insurance industry and the banking industry are fundamentally distinct. We provide different types of services and focus on different time frames,” Keating wrote. “Unlike banks, life insurers must plan and manage risk for claims that may not arise for 30 or 40 years. Life insurers use sophisticated tools to manage those risks and these tools have proven to be effective and financially sound over the course of many decades. We hope the House-Senate conferees will re-examine the consequences of denying life insurers the use of highly reliable risk management tools,” Keating said.

Keating also cites the “Volcker” rule in House bill S. 3217, which blocks certain investment activities on the part of banking institutions and seeks to prevent potential abuse of insured deposits by banks. He points out that Investment activities identified as proprietary trading and hedging would be specifically prohibited. “S. 3217’s version of the Volcker Rule goes beyond the original intent of the proposal to apply proprietary trading restrictions to all the subsidiaries and affiliates within a holding company system that contains a depository institution,” he writes.

He adds that could mean the investment activities of insurers who own banks or thrifts “would be significantly disrupted, and in some cases be forced to come to a halt.”

“This is true in spite of the fact that life insurers’ permitted investment activities are already heavily regulated under state law.”

As for the fiduciary provisions that currently keep insurance agents at arm’s length from financial advisors and the way they’re regulated, Keating calls for harmony – but only to a point. “At the outset of the debate over the standard of care owed by financial intermediaries to consumers, ACLI expressed clear principles a harmonized standard should be established that accommodates different distribution systems and offers the most options to consumers,” he concluded.

Other industry leaders want the current state-by-state oversight model to be left in place.

The Insurance Agents & Brokers of America (IIABA) makes that case in its own letter to Congress – supporting the parts of the legislation that draw a “clear distinction” between the [property and casualty market and other financial services markets that exists in the final version of house bill 3217.

“Property/casualty insurers played no role in creating the crisis and pose no systemic risk to the overall economy,” said Robert Rusbuldt, president of IIABA. “In fact, the state regulatory system, while in need of more uniformity and efficiency, has a proven track record of ensuring insurer solvency, industry competition and growth, and consumer protection, and we believe the House and Senate have both made the correct decision in recognizing the strength of the state regulatory system for insurance.”

SEC: New “flash crash” rules in place

It took more than 30 days, but the Securities and Exchange Commission came out Thursday with new rules to safeguard financial markets from the “flash crash” that drove the Dow Jones Industrial Average down 1,000 points last May 6.

At the center of the new regulations is an automatic system breaker that would halt trading in the event of specific stocks trading at big swings. The new rules will be in effect for six months, at which point the SEC will review the effectiveness of the regulations.

The SEC says the circuit breakers will be in place for Friday, June 11 trading.