Yesterday, the Senate Committee on Banking released more than 1,100 pages of draft financial regulatory reform legislation, over 200 pages of which addresses investor protection and securities regulation. While the Senate's Restoring American Financial Stability Act of 2009 seeks to address the same issues as the House's Investor Protection Act, the Senate has taken a very different approach to responding to the Obama Administration's mandate to raise the standard of conduct for broker-dealers providing investment advice to the fiduciary standard.
Specifically, the Senate Banking Committee proposes to remove the exemption from the Investment Advisers Act of 1940 for brokers who provide advice that is "solely incidental" to their brokerage activities. With the removal of this exemption, any broker who fits the definition of an "investment adviser" under the federal securities laws would be required to register as such with the SEC and be subject to investment adviser requirements, including the fiduciary standard.
The Senate committee's approach is markedly different from the House Financial Services Committee's proposal, which would keep the broker exemption in place and add a requirement to the Securities Exchange Act of 1934 that brokers providing advice to retail customers follow the same standard of conduct as investment advisers. However, the approach has proven to be messy because it keeps two separate sets of rules in place for brokers and investment advisers making the ultimate goal of "harmonizing" investor protection rules for financial professionals harder to achieve. It also has presented opportunities for legislators to add amendments to the House's proposed bill that could chip away at the fiduciary standard on the broker side rather than bringing the standard for brokers up to the same stringent level as the standard currently applicable to advisers.
Overall, the Senate committee's proposal provides a much cleaner way to provide consistent protections to investors who receive advice by keeping the established fiduciary standard in place and extending it more broadly to brokers. Moreover, the committee's draft bill has recognized the need to accomodate certain aspects of the broker business model by proposing amendments to the Advisers Act that would allow professionals to receive asset management fees and commissions and would give the SEC the authority to exempt persons and transactions from the current prohibition against principal trading if in the public interest. Again, such concessions still keep the fiduciary standard in place while making it possible to bring more consistent regulation to all professionals providing advice. In addition, the Senate has proposed additional investor protections that would require professionals to properly manage conflicts of interests and disclose to clients limitations on the range of investment products that they offer and recommend.
Of course, increasing investment adviser registrations at the SEC begs the question of how will an already strained adviser examination program take on additional responsibilities. The Senate committee has tried to address that issue through a proposed provision that would raise the assets under management threshold for federal registration to $100 million shifting some responsibility to the states. In addition, other proposed provisions would allow the SEC to transition to a self-funded model allowing it to set its budget each year without Congressional approval and retain fees it collects from registered entities to fund the budget. Such a model would give the SEC more access to funding and resources needed to effectively run its programs.
The Senate Banking Committee is expected to hold hearings and start marking up the proposed legislation in the coming weeks with the goal of completing the bill by December and sending it to the Senate floor. The full House is also expected to vote on comprehensive financial reform legislation in early December.
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