Though not a surprise, the absence of the extension of the fiduciary standard in Senator Christopher Dodd's new proposal for financial regulatory reform is still a disappointment. On Monday, Dodd spoke of plugging gaps and creating greater regulator accountability, but failed to back up these promises on the fiduciary front. And while groups like FSI and NAIFA pushed for and now applaud the proposed study of investment adviser and broker-dealer regulation, it's investors that would remain out there unprotected while the SEC studies issues of which it already has expert knowledge.
The looming question is what's next? Well, the truth is financial reform legislation is far from being a foregone conclusion. Dodd must still gain bipartisan support for his proposal in order to successfully push it through an aggressive Senate Banking Committee mark-up schedule and then guide it through the Senate floor. And let's not forget that a final Senate bill will still need to be reconciled with the bill passed by the House last December. As a lawyer, it's often my job to be the Debbie Downer in the room, and while this run down of the legislative process may sound dismal for investor protections, there may be hope just yet.
With main stream media taking a bigger interest in the fiduciary issue, there is still time for the legislative pendulum to swing back in favor of extending the fiduciary standard to brokers who provide advice. However, barring that swing, the greatest hope lies with the regulators.
Many have focused on the Obama Administration's apparent lack of influence on Congressional action, but have failed to realize the impact the Administration can have on regulatory action. The DOL's recent re-proposal of 401(k) participant advice rules, which would ensure investors receive non-conflicted advice, and their other impending proposals and actions, such as the expansion of the definition of fiduciary, are key illustrations of the positive impact and influence agencies in Washington, DC can and likely will have on investor protection under the Obama Administration.
If the Senate's current proposal for a regulatory study is successful, the SEC's resources would be focused on that study for a year, but the agency will likely be ready to spring into action to strengthen fiduciary measures once the study is complete. With several of its Commissioners firmly in favor of extending the fiduciary standard, SEC staff hard at work analyzing possible fiduciary measures, and the SEC Investor Advisory Committee providing recommendations, it's becoming clearer that the agency will be primed and ready to act with or without legislation.
Of course, the question remains whether SEC resources will be adequate enough for the agency to forge ahead with regulatory reforms and provide effective oversight and enforcement. Fortunately, this is an area where Congress appears willing to act. The House bill approved in December would allow the SEC to collect fees from investment advisers to cover examination expenses and also includes appropriations for the agency through 2015 that would double the SEC's budget over the next five years. Alternatively, the current Senate proposal would give the SEC more power to increase its resources by removing it from the appropriations process and allowing it to set its own budget, which would be funded by fees and assessments collected under its current statutory authority. Under either measure, the SEC will have greater authority and flexibility to respond to the regulatory needs of investors.
Bottomline, although the legislative road may lead to a disappointing outcome on the fiduciary front, the widespread public attention fiduciary issues have received over the past year could still result in a regulatory victory for investors and fiduciary principles alike.
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