fi360 Blog

How to write an effective comment letter to the SEC

Have you submitted your comments to the SEC on its Study Regarding Investment Obligations of Brokers, Dealers, and Investment Advisers?  If not, I highly encourage you to take the time to get involved in the SEC's efforts to bring clarity to the regulation of investment professionals and provide greater protection to investors.  You must act fast as the deadline for comments is this Monday, August 30.

In writing and submitting comments, it's important to recognize the unique opportunity being provided to investment professionals and the investing public with this comment period.  First, it's an opportunity to provide input to the SEC that will be incorporated into its overall study and the final report that it must submit to Congress in January.  Second, it is also an opportunity to potentially shape future rulemaking by the SEC that will codify the existing fiduciary standard for investment advisers in SEC regulations and extend the same fiduciary duty to broker-dealers who provide investment advice.  With this in mind, I would advise those that would like to submit comments to take the time to consider the type of input that will both allow you to voice your opinion on the regulation of investment professionals, but also asssist the SEC in fulfilling its duties and exercising its authority under the Dodd-Frank Act.  

As a former SEC attorney, I speak from experience when I say that the most helpful comments are the ones that take the time to address issues and questions presented by the SEC, provide specific examples of how regulations play out in professional practice, cite to concrete numbers and statistics (and their source), and offer potential solutions on how to address a regulatory issue. 

Looking at the current request for comment, it's important to note that the SEC has been tasked with analyzing fourteen specific topics.  To the extent commenters take the time to comment on any or all of these areas, it will be extremely helpful to the SEC. In addition, SEC Chairman Schapiro stated in a speech in July that "Comments that recognize the primary and central importance of investor protection, but offer suggestions on implementing fair and flexible regulation, will help us craft rules that increase investor confidence while preserving brokers' ability to offer a full spectrum of services." Thus, the agency essentially has provided a roadmap to commenters on what information will be most useful.

In viewing comments that have already been submitted to the SEC, I would note that a form letter, referred to as Type A, submitted by over 200 insurance brokers provides a good example of a letter that could be useful to regulators.  While I don't necesarily agree with all of the viewpoints expressed in the letter and I also question the effectiveness of only submitting a form letter, the format of the letter itself is good because it addresses both issues raised by the study and addresses potential rulemaking.  The letter could be improved by including some of the examples and concrete number or statistics I mention above.  

Fi360 is diligently working on finalizing its comments for the SEC, and our hope is that other supporters of the fiduciary standard will take the time to submit comments as well and provide the SEC with the information and support it needs to effectively implement regulations that promote fiduciary principles.  

New era of regulation begins, now is the time to let SEC and DOL know what you think

On the heels of the financial crisis and last week's passage of the Dodd-Frank Act of 2010, a new era of regulation is now upon us and Washington regulator's are moving at a brisk pace to vet and implement new rules that will provide greater protections for investors by increasing transparency and accountability by market participants.  What is most notable about this new era is the opportunity for the public to provide input that could shape new regulations.  Here is a run down of some key issues currently being considered in Washington: 

• SEC Study of Broker-Dealers and Investment Advisers.  The SEC must study and report back to Congress by January 2011 on regulatory standards of care for brokers and advisers.  The results of the study are expected to form the basis for future rulemaking by the SEC to implement a consistent fiduciary standard for brokers and advisers.  The SEC has initiated a 30-day public comment period, which will likely end on August 30, 2010.
• Open Comments on SEC Initiatives under Dodd-Frank Bill.  The SEC also has invited public comment on a host of other initiatives that it must undertake pursuant to the Dodd-Frank bill.  Of most interest to our readers may be the SEC's review of investment adviser exams (which the SEC must study and report on by January 2011), and pre-dispute arbitration (which the SEC now has the authority to limit).  There currently is no deadline for comments, but the public should note that deadlines will be imposed once the SEC announces a formal request for comments or engages in rulemaking for any particular issue.  
• SEC "12b-1" Proposal.  The SEC has put forth a proposal that would eliminate traditional 12b-1 fees and break them down into "ongoing sales charges" and "marketing and service fees" that will be subject to caps and new disclosure requirements.  Comments on the proposal are due November 5, 2010.
• DOL 408(b)(2) Interim Final Rule. DOL issued its final rules under ERISA Section 408(b)(2) requiring service providers to provide specific service and compensation disclosures to plans.  The new rules will go into effect July 16, 2011.  In the meantime, DOL has invited public comment on the new rules, specifically on the feasibility and cost effectiveness of requiring plan service providers to furnish plan fiduciaries a summary disclosure statement. Comments are due August 30, 2010.
• SEC Target Date Fund Proposal.  The SEC issued a proposal in June that would establish new dislcosure and advertising requirements for target date funds.  Comments are due August 23, 2010.

These initiatives and comment periods only mark the beginning of the new wave of regulation expected from Washington in the next couple of years.  We urge our readers to stay informed on regulatory reform, provide input to regulators, and encourage your business partners and clients to do the same. 

With regulatory reform passed, the hard work begins

Today the Senate pushed financial regulatory reform past it's final hurdle by first voting for cloture (60-38) and then just a few hours later approving (60-39) the Dodd-Frank conference report.  Now that the conference report has gained both House and Senate approval, the Dodd-Frank Wall Street Reform and Consumer Protection Act will be sent to President Obama for his signature in a matter of days.  And once the ink of the president's signature dries, the clock will start ticking for federal agencies who will be required to complete numerous studies and rulemakings within the next few years under timetables set by the new legislation.  This means that while Congress heads into its August recess, federal agencies that are accustomed to a quiet August, will be kicking into high gear to meet their new obligations.

The SEC, in particular, will have its work cut out for it as it scrambles to complete approximately 20 studies and 95 new rules and coordinate with other agencies on several other studies and rules.  While most studies have a time line of one to three years, in the next six months, the agency must study and report back to Congress on (1) the effectiveness of standards of care for broker-dealers and investment advisers, (2) the need for enhanced examination and enforcement resources for investment advisers (including whether an SRO is needed), and (3) how to improve investor access to information on broker-dealers and investment advisers.   

Meanwhile, the DOL appears to be set for a flurry of activity of its own.  The DOL's Employment Benefits Security Administration released on its website earlier today the soon to be published ERISA 408(b)(2) regulation.  These long-awaited rules will finalize requirements for disclosures by service providers to defined contribution and defined benefit plans and will go into effect July 16, 2011.  Although the final rules differ in some respects from the proposed rules, they will put into place strong disclosure requirements.  In particular, service providers will be required to disclose their services and compensation, including whether they are providing any services as a fiduciary to the plan.  

In addition to the release of the 408(b)(2) rules, DOL is also expected to release a proposal later this year that will address disclosures to participants under 404(a)(5), and a separate proposal that will clarify and expand the definition of "fiduciary" under ERISA.  Additional guidance on target date funds is also expected as well as a proposed amendment to 404(c)(5) concerning qualified default investment alternatives.  

House insists on fiduciary responsibility

This morning, financial reform Conference Committee Chair Barney Frank emphasized the need to adopt fiduciary responsibilities for brokers when he put forth the House offer of amendments to strengthen the investor protection provisions (found in Title 9) of the financial reform bill base text.  

During his opening statement, Frank highlighted both SEC funding and fiduciary responsibility, stating that the House believes both are "essential to protecting investors."  While discussing fiduciary responsibility, he submitted  to the record a "long list of letters" in support of extending fiduciary duties to brokers.  With regard to protests raised by insurance brokers about concerns of conflicts with their ability to sell proprietary products, Frank noted that the bill allows insurance brokers to work within the jurisdiction of the companies they work for and that they don't have to go outside of those products.

Frank turned the discussion over to Representative Paul Kanjorski (D-PA), who noted that the focus of the amendments put forth by the House seek to, among other things, strengthen standards of conduct and the SEC's enforcement authority.  With regard to the fiduciary duty, Kanjorski stated, "it sounds like a complicated thing, but it's not."  He emphasized that the House is seeking to ensure that both broker-dealers and investment advisers owe the same fidelity to their customers when providing the same services to those customers.  He also stated that he believes the change is long overdue and that there is no reason to delay it, noting that if a survey was taken of the general public, most people probably would not believe that these professionals operate under different standards of care.

Kanjorski also specifically responded to "misnomers" he believes have incorrectly been attached to the House bill regarding fiduciary responsibility.  In particular, Kanjorski stated that the bill will not prevent broker-dealers from receiving commissions and does not prevent the sale of proprietary products.  He also noted that the bill states that there is no continuing duty of care after advice is provided by a broker-dealer.  In essence, the fiduciary duty would apply at the time the customer is receiving advice from the broker-dealer, but there is no continuing responsibility unless another transaction occurs.

Representative Jeb Hensarling (R-TX) spoke up in favor of the Senate provision that would require an SEC study of the difference between the standards of care between broker-dealers and investment advisors.  He reiterated concerns he had previously raised during the House Financial Services Committee markup of the House financial reform bill that the extension of the fiduciary duty will have unintended consequences for the discount brokerage business model.  Hensarling noted that Frank had worked with him in good faith to address these concerns before the bill passed on the House floor, but stated that he does not feel that language added to the bill goes far enough to address his concerns.  In particular, Hensarling stated he hopes that legislators and regulators will not just run with the legalistic title of "broker-dealer", but rather will aim to address particular activity and conduct. 

Frank responded directly to Hensarling's concerns by emphasizing that the fiduciary duty for broker-dealers will only apply to "personalized investment advice" and that there is no continuing duty after personalized investment advice (it ends the day the sale is made according to Frank).

While it is good to see the House coming out with a strong position on extending the fiduciary duty and strong responses to objections raised by the insurance and brokerage industries, it is still disconcerting to hear the members discuss fiduciary duty in a light that differs from how it applies to investment advisers, namely the fact that the bill would allow the fiduciary duty to end once a transaction closes.  This language ignores the ongoing nature of the relationship between an investment professional and investor who relies on that investment professional on more than just a transaction-by-transaction basis.  It also highlights the fact that if the fiduciary standard is extended to broker-dealers, great leadership will be required from the SEC to provide clarity on what the fiduciary standard means and how it applies to interactions between broker-dealers and investors, as well as between investment advisers and investors.  

There is still much to be discussed and debated today on the fiduciary standard, so it's fate has not yet been decided.  The Senate will be given an opportunity to extend a compromise to the House and then both sides will negotiate a "final" provision. 

UPDATE JUNE 16, 2010, 6:06pm

Senator Chris Dodd (D-CT) stated in his response to the House's offer today that the Senate conferees are not prepared to address the House offer on the fiduciary standard.  Senator Tim Johnson (D-SD), the author of the Senate provision that would require an SEC study, is working on a response that is expected to be ready within the next couple of days.  This indicates that the Senate clearly disagrees in some manner with the House's proposal to extend the fiduciary standard to broker-dealers, but the Senate has not yet outright rejected the House's proposal, which could signal a willingness to reach a compromise on the fiduciary issue. 

Senate-House conference committee fiduciary decision coming tomorrow

The process of reconciling the Senate and House versions of financial regulatory reform bills begins in earnest today, as the first provisions are up for consideration by the conference committee to decide what will be included in the final version of the combined bill. The agenda for today does not include the portion relevant to the fiduciary standard, though the Committee for the Fiduciary Standard is reporting on their LinkedIn page that the fiduciary discussion should occur tomorrow.

Some good resources for those of you following at home include the Senate Banking Committee's Key Issues page, which is updated with new materials as they develop, the Banking Committee's Newsroom, which is where the agenda for today was first printed, and the House Financial Services Committee's page dedicated to the conference, where they post all relevant materials. C-SPAN is also covering the conference live.

The fiduciary provision is contained in Title IX, subtitle A. So when that appears on the agenda for consideration by the committe, we will know exactly when that discussion is to take place.

UPDATE: The House Financial Services website now confirms that the Title IX, subtitle A (i.e., the fiduciary provision) is on the agenda for tomorrow. And, the House is proposing to replace the Senate provision to study the issue with their own provision to enact the fiduciary standard.

In the meantime, the Committee is calling on anyone who wants to see a fiduciary standard for all investment advice to call the offices of the conferees to express their support for the House provision for establishing the fiduciary duty, rather than the Senate's provision for an SEC study. Here is the complete text from the Committee's announcement:

Announcement from The Committee for the Fiduciary Standard

Last Call! Conference Committee Scheduled to Act on Fiduciary Provision on Wednesday.

The Conference Committee is scheduled to meet on Wednesday on the fiduciary provision. The Senators on the Conference Committee are the key votes.

Calls from constituents do matter. Please call your Senator and urge him or her to vote for the House provision establishing a fiduciary duty for brokers providing investment advice to retail investors, NOT for the Senate’s version which proposes a “study” of whether brokers should have to put client’s interests first.

Christopher J. Dodd Chairman (D-CT) - 202-224-7391
Tim Johnson (D-SD) - 202-224-5442
Jack Reed (D-RI) - 202-224-4642
Charles E. Schumer (D-NY) - 202-224-6542
Richard C. Shelby Ranking Member (R-AL) - 202-224-5744
Mike Crapo (R-ID) - 202-224-6142
Bob Corker (R-TN) - 202-224-3344
Blanche Lincoln (D-ARK) - 202-224-4843
Patrick Leahy (-VT) - 202-224-4242
Tom Harkin (D-Iowa) - 202-224-3254
Saxby Chambliss (R-TN) - 202-224-3521
Judd Gregg (R-NH) - 202-224-3324

Regards,
Knut

Knut A. Rostad
Chairman
The Committee for the Fiduciary Standard
www.thefiduciarystandard.org

How the fiduciary issue will be resolved in Congressional reform bill

With the Senate passing its financial reform legislation last week, we appear to be in the final stretch of reaching a final bill.  So exactly where do we go from here and how will affect the fiduciary standard?  Members of the Senate and House will now participate in a conference committee to reconcile differences between the House's Wall Street Reform and Consumer Protection Act (H.R. 4173) and the Senate's Restoring American Financial Stability Act (S.3217).  Once the committee completes its work, it will submit a conference report to both the House and Senate, which both must approve the report for the reconciled bill to become law. 

The conference committee is expected to start its work in June and to take about a month to resolve outstanding differences.  Many lawmakers are predicting a bill will be ready for President Obama's signature before the July 4th holiday.  Congressman Barney Frank (D-MA) and Senator Christopher Dodd (D-CT), the chairs of the House Financial Services Committee and Senate Banking Committee, respectively, will lead the conference committee.  Yesterday, the Senate appointed eleven other members to the conference committee, all whom come from the Senate Banking and Agricultural Committees.  House Speaker Nancy Pelosi (D-CA) is expected to name the House appointees to the conference committee within the first two weeks of June.

In the meantime, Congressional staff will be working behind the scenes to reconcile minor differences between the bills and identify a list of key issues for the conference committee to resolve.  With House members of the committee still to be named, much of the heavy lifting with regard to negotiations is expected to take place throughout mid to late June. 

For those closely watching the fiduciary standard and how it will be addressed in financial regulatory reform legislation, let's be clear, this has not been one of the big ticket items receiving Congress' attention.  There are bigger issues, such as derivatives regulation, a proposed consumer protection agency, and the so-called Volcker rule, that will occupy most of Frank's and Dodd's time as they navigate the negotiations of the committee.  With that said, the conference committee still marks a critical period for the fiduciary standard and its possible extension to broker-dealers who provide investment advice. 

We are now down to two final provisions that address the fiduciary standard in markedly different ways.  The Senate's bill would require the SEC to complete a study and report back to Congress on the effectiveness of investment adviser and broker-dealer regulation, including the fiduciary and suitability standards under which they operate, and whether there are differences or gaps that should be addressed through legislation or regulatory rulemaking.  It remains unclear, however, how much authority the SEC would have to engage in rulemaking after it completes the study.  The House bill, on the other hand, provides clear authority for the SEC to act upon adoption of legislation to extend the fiduciary standard to broker-dealers who provide investment advice. 

The question remains whether the Senate version or House version will prevail in final legislation.  Congressman Frank has suggested he will seek to maintain strong investor and consumer protections in a final bill, but with larger issues looming, the fiduciary standard could be a chip that is bargained away in order to reach consensus on more controversial issues.  All would not necessarily be lost, though.  Even if the Senate's provision prevails, it at least means the fiduciary standard stays in the spotlight while the SEC studies and reports on it.  Moreover, as I've mentioned in the past, the SEC Investor Advisory Committee and SEC staff remain focused on the fiduciary standard and ways the SEC can adopt fiduciary-like measures, such as improved disclosure rules.

And finally, there is an even greater benefit that professionals need to capitalize on now and moving forward.  The fiduciary standard has received a great deal of attention from legislators and regulators over the past year and has been increasingly covered by both the trade and popular media.  Mercer Bullard summed up the potential impact of this coverage at the fi360 conference just a few weeks ago when he noted that professionals need take advantage of the current legislative environment and related press to inform the public and investors and prevent any possible dilution of the fiduciary standard. 

With no vote on cloture providing more time, Senate has opportunity to come together on fiduciary amendments

Yesterday, a vote for cloture failed in the Senate, which means the debate for financial regulatory reform will continue past this week.  The final vote revealed at least one interesting development in financial regulatory reform--that attempts by Democrats to court Maine Republican Senators Olympia Snowe and Susan Collins, who both voted for cloture, have been successful.  However, the vote ultimately failed as a result of Democratic Senators Russ Feingold (WI) and Maria Cantwell (WA) breaking from their Democratic colleagues and voting against cloture, signaling their frustration that not all proposed amendments have been considered yet.  So, for now, debate will continue for the remainder of this week and continue into next week, but a new motion for cloture will likely materialize quickly.

Some are viewing the continued debate as a positive outcome for financial regulatory reform.  For the fiduciary standard, in particular, it could signal a second (or are we now on the third or fourth?) chance to make it into a final bill.  With the Senate focused on larger issues, the fiduciary standard has not had its moment in the spotlight on the Senate floor yet.  However, complicating matters for the fiduciary standard is the trifecta of amendments put forth by Arlen Specter (D-PA), Daniel Akaka (D-HI) and Susan Collins.  Akaka's amendment at this point appears to be the greatest hope because it nearly mimics language in the bill passed in November by the House, which calls for a fiduciary duty for any broker-dealer who provides personalized investment advice to retail investors.   

Specter's and Collins's amendments, while admiral in their attempts to promote fiduciary responsibility, appear also to have created a confusing environment for the extension of the fiduciary standard. On the bright side, Specter's amendment would protect both retail and institutional investors while extending the fiduciary standard to broker-dealers. The amendment, however, seems to try to cover traditional brokerage activity that even advisory and investor groups have acknowledged should not be covered.  Specter's amendment also tries to criminalize "willful violation" of the fiduciary standard by broker-dealers, which has opened up a new can of worms that not too many seem happy to tackle. 

Collins, on the other hand, has put forth an amendment that largely tracks Akaka's amendment, but creates an unusual carve out for proprietary products, mutual funds and variable annuities.  Apparently, Collins has been vulnerable to the brokerage and insurance lobbies that have argued they won't be able to operate properly under the fiduciary standard.  Several articles have already claimed that the Collins amendment is a major disappointment and even betrayal in the eyes of advisory and consumer groups. What Collins' amendment (and Specter's for that matter) highlights to me, though, is what has gone wrong in general with financial regulatory reform and Congressional efforts as a whole.  Special interests permeate the legislative process, and what should be clear problems for which clear and simple solutions are devised, end up being muddled issues with ineffective solutions.  

When it comes to the fiduciary standard, from the beginning, investor and advisory groups have advocated for one thing:  extend the fiduciary duty to broker-dealers who provide investment advice to investors.  Do so, and you will ensure that all investment advice professionals minimize conflicts of interest and are transparent about the conflicts of interest that remain.  However, what we've ended up with is a Senate bill that calls for the issue to be further studied (despite the release of the SEC's RAND Report in 2008) and three proposed amendments, all of which in their own right fail to provide the clear and simple solution to address investor confusion in the marketplace.  Here's to hoping that the extra time bought by today's failed vote for cloture and the continuing attention mainstream media outlets, such as the Wall Street Journal and New York Times, have shown to the fiduciary standard will finally bring clarity to the issue and the simple and workable result that investors deserve.

UPDATE MAY 20, 2010, 3:58pm

A second vote for cloture this afternoon in the Senate was successful with a final vote of 60-40.   Further consideration of the Senate's financial regulatory reform bill will now be limited to thirty hours, and no more amendments may be submitted on the bill.  After the cloture vote, Senator Harry Reid (D-NV) indicated they would work to consider outstanding amendments the remainder of the day in hopes of quickly reaching final consensus on the bill.  A vote on the Senate's version of financial regulatory reform legislation could come as early as tomorrow.  With the bill nearing the finish line in the Senate, it's unlikely the amendments on the fiduciary standard will be considered on the Senate floor, but it could be included in a manager's amendment expected to be submitted by Christopher Dodd (D-CT), Chairman of the Senate Banking Committee.  If the fiduciary standard is not included in Dodd's amendment, there may still be hope that the House fiduciary provision, which extends the fiduciary standard to broker-dealers providing personalized investment advice to retail investors, will prevail when the Senate and House reconcile their respective financial reform bills in conference. 

A comparison of responses to the 2010 investment advice rule

The deadline for submitting comments to the DOL on the 2010 Investment Advice Rule was May 5th and sixty-eight comment letters were submitted by individuals or organizations.  The expectation is that the comments will be analyzed in short order and the final rule published later this year. To get an idea of how the final rule might go, we'll take a look at two of the comment letters submitted.

The American Benefits Council, the American Council of Life Insurers (ACLI), and the Investment Company Institute (ICI) submitted joint comments. Their comments recommended the following:

• State that historical performance is an appropriate factor to consider
• Refrain from defining generally accepted investment theories
• Refrain from favoring one investment style
• Clarify the fee leveling condition by stating that fees cannot vary, but remove the suggestion that the fiduciary adviser is not permitted to receive any compensation based on the investment chosen

In fi360's submitted comments, it's interesting to see how our thoughts compare with respect to the four overall recommendations submitted by the American Benefits Council, ACLI, and ICI.  Specifically, fi360 stated:

• A fund's past performance relative to the average for its asset class is an appropriate criterion for allocating assets to the fund; especially risk-adjusted returns.
• Modern Portfolio Theory (MPT) and the Efficient Market Hypothesis (EMH) should be specified as generally accepted investment theories.  Others may be permitted as well, but there is a need to be specific to (a) assure that the processes used to formulate the asset allocation and investment selection recommendations are reasonable and (b) make certification of the computer model practical.
• The model should not assign different levels of risk to passively versus actively managed investment options because this would be neither practical nor reliable.
• The fee neutral (leveling) requirements in the proposed rules will provide significant benefits to participants and beneficiaries.

For three of the four, the organizations are pretty much on the same page; a sampling of comments submitted by others indicate that most agree on these issues as well, although there are differing views on specifics related to the fee neutral approach.  Where we find differences is with respect to generally accepted investment theories.  The American Benefits Council, ACLI, and ICI favor letting the market determine how and what generally accepted investment theories are applied to computer models and fi360 called for more specific guidance.  Fi360 also stated that the fee neutral approach is preferred because the complications and possible manipulation related to the computer model with respect to managing conflicts of interest will make it much more difficult to implement and enforce.

Clearly there is interest in this final rule and most agree that implementation is necessary in order to give participants better access to professional investment advice.  We're hoping that we see the final rule very soon.

Delays working in favor of fiduciary in reform

The tides for the fiduciary standard appear to be turning, and for once the delay on Capitol Hill to adopt financial regulatory reform may have worked in its favor.  While Republicans blocked debate on the Senate's financial reform bill  most of this week in hopes of achieving consensus behind closed doors on issues such as "too big to fail", derivatives, and financial consumer protections, the fiduciary standard quickly gained greater attention thanks to the SEC's case against Goldman Sachs and a drawn out Senate hearing this week in which Goldman execs were grilled for over 10 hours. 

Now that Republicans appear ready to debate financial regulatory reform, it still remains to be seen whether the changing tide and increased public focus on the fiduciary standard will have any real impact on financial reform.  For example, questions put forth by Senator Susan Collins (R-ME) during Tuesday's hearing raised the issue of whether proposed reforms aimed at extending the fiduciary standard to broker-dealers should apply the standard equally to all investors, as is the case under the Investment Advisers Act of 1940.  To date, most consideration of the fiduciary standard by the Senate and House has focused on investment advice provided to retail clients.  However, despite Collins' deep scrutiny of Goldman representatives and apparent interest in the fiduciary standard, she does not yet appear to be willing to fully back the extension of the fiduciary standard, a reluctance that appears to be common among legislators who have likely been influenced by the large brokerage and insurance lobby against the fiduciary standard.

Although many legislators have been unwilling to fully embrace the fiduciary standard to date, it is clear that they are outraged by the lack of transparency and dubious ethical dealings on Wall Street and are seeking solutions to address those issues.  Indeed, a closer look at Senator Collins' line of questioning reveals that she was not so worried about legal standards, but rather whether Goldman on its own had embraced a fiduciary ethic, which should have provided a moral compass for the investment bank's activities. While it's true Washington can't completely legislate or regulate away unethical behavior, regulatory standards can and do provide a moral compass for market participants to judge their actions.  And what the fiduciary standard, in particular, does is provide a course whereby financial professionals are challenged to act in a transparent and ethical manner by properly addressing and disclosing conflicts to the benefit of investors.  As soon as legislators realize that the fiduciary standard provides a proven path to address much of the questionable behavior displayed on Wall Street, they will see they have at least part of the solution to ensuring, in Senator John Ensign's (R-NV) words, "we don't end up hurting the little guys out there on Main Street." 

Help support the Akaka-Menendez amendment in Senate bill

After meeting with top Republicans and Democrats from Capitol Hill this week, President Barack Obama and Treasury Secretary Timothy Geithner expressed optimism about the prospects of a financial regulatory reform bill passing this year.  While Republicans have shown mixed support for proposed reforms, there still appears to be a willingness to work with Democrats to reach compromise on key provisions in the proposed Senate financial bill.   

Meanwhile, support for the fiduciary standard on Capitol Hill appears to be growing.  Senators Daniel Akaka (D - HI) and Robert Menendez (D - NJ) are considering offering an amendment to the Senate bill that would remove a provision that calls for a study of whether the fiduciary duty should be extended to broker-dealers.  The proposed study would be replaced with a provision that would authorize the SEC to adopt rules requiring broker-dealers who provide advice to comply with the fiduciary standard--an approach similar to that approved in the House financial bill.   The Senators, however, must first determine whether their colleagues will support their proposal because a vote against the amendment could jeopardize future efforts by the House to maintain their fiduciary provision in final legislation.

Another key issue also gained attention this week as Senator Charles Schumer (D - NY) teamed up with SEC Chairman Mary Schapiro and several former SEC Chairman to support self-funding for the Commission.  Self-funding would give the SEC greater control to budget and plan for the long-term.  In addition, self-funding would likely allow the SEC to retain its role as the sole regulator of investment advisers and improve its oversight and enforcement programs.

In order for these key provisions to be adopted along with comprehensive financial reform legislation, support and advocacy from professionals and investors alike will be critical.  To this end, industry groups, including the Committee for the Fiduciary Standard, have been encouraging professionals to support the fiduciary standard and SEC self-funding.  In particular, you can do your part by calling, e-mailing, or writing your Senators to voice your support for the proposed Akaka-Mendendez amendment and the existing provision that ensures SEC self-funding.   Here is an example of what you can write/say to your Senator: 

Dear Senator _______

I am an investment professional calling/writing from _____ (city) about the Senate's Restoring America's Financial Stability Act.  I urge you: (1) to support an amendment sponsored by Senators Akaka and Menendez that would require financial professionals who provide investment advice to comply with the well-established fiduciary standard; and (2) to keep the SEC self-funding provisions in the bill.

Fiduciary Standard.  The future well-being of the nation requires that all Americans increase their savings and make the best possible investment choices.  As investing has become more complicated, the role of financial professionals has become more vital.  Research by the Investment Company Institute found that 73% of investors consulted a professional financial advisor before investing in a mutual fund. Unfortunately, not all financial advisors are required to be fiduciaries, who, by law, must put the client’s best interests first. The key overriding mandates of the fiduciary standard are highlighted in the following five core principles:

• Put the client’s best interests first;  
• Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
• Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;  
• Avoid conflicts of interest; and
• Fully disclose and fairly manage, in the client’s favor, any unavoidable conflicts

The Akaka-Menendez amendment would ensure that all investor's receiving investment advice would be protected under these fiduciary principles.

SEC Self-funding. The bill currently includes a provision that allows for an SEC self-funding mechanism. This is critical to allow the SEC sufficient funding so that it can plan for long term internal investments and better fulfill its investor protection mission. I support the SEC as the exclusive regulator of federally registered investment advisers, including providing the agency with the resources it needs to fulfill this role.

I appreciate your consideration of my concerns.

Respectfully,
(Name)
(City, State)

With financial regualtory reform legislation expected to be debated on the Senate floor as early as next week, you should call or write your Senator as soon as possible.  Moreover, please encourage your colleagues and associates to do the same as an united front is critical to the success of the fiduciary standard and to ensuring continuity in SEC oversight.