Departing Dodd’s last hurrah: fiduciary standard reform

Senate Banking Committee Chairman Christopher Dodd’s decision to retire at the end of the year frees him from outside pressures and could allow him to push through proposals to bring brokers under traditional fiduciary standards, according to consumer and adviser lobbyists.

Mr. Dodd, a Connecticut Democrat who had been facing a bruising 2010 re-election campaign after reports emerged that he received favorable mortgage terms from defunct subprime lender Countrywide Financial Corp., said Wednesday that he won’t seek re-election. The surprise announcement set off speculation about the fate of financial reform legislation that he is spearheading in the Senate.

The draft legislation that Mr. Dodd released in November includes provisions strongly favored by investment adviser groups but opposed by the brokerage industry. It would require all brokers providing investment advice to register as investment advisers and abide by the fiduciary standards defined by the Investment Advisers Act of 1940.

The draft deletes a provision in that law that exempts brokers from registering as investment advisers if they provide advice deemed “solely incidental” to selling securities.

Mr. Dodd’s decision to retire will allow him “to devote 100% of his time” to pushing his financial-reform legislation through the Senate, said Marilyn Mohrman-Gillis, managing director of public policy for the Certified Financial Planner Board of Standards Inc.

In addition, now that Mr. Dodd need not worry about a re-election campaign, it “may make it more likely that he will withstand the lobbying onslaught with regard to fiduciary duty,” said Mercer Bullard, president of Fund Democracy Inc., a group that advocates on behalf of mutual fund shareholders

The brokerage industry strongly disagrees with Mr. Dodd’s approach, arguing that forcing brokers to become investment advisers would limit brokers’ ability to conduct their traditional businesses. Its advocates are lobbying members of the Senate Banking Committee hard to get them to support an approach similar to the bill approved by the House in December.

That bill, the Wall Street Reform and Consumer Protection Act of 2009, would also impose fiduciary duties on brokers who provide investment advice, but the Securities and Exchange Commission would be given more authority to write new standards for brokers and investment advisers.

David Tittsworth, executive director of the Investment Adviser Association, which represents investment advisory firms regulated by the SEC, agreed that Mr. Dodd’s retirement “will strengthen his resolve to get something done this year. He’ll probably look at this as part of his potential legacy.”

But Mr. Tittsworth said that he isn’t sure how the fiduciary-standard issue will be addressed in the bill that finally emerges from the Senate, if at all. “How it will affect investment adviser issues is still very much an open question,” he said.

Mr. Tittsworth pointed to a statement issued in December by Mr. Dodd and Alabama Sen. Richard Shelby, the ranking Republican member of the Banking Committee, that listed the financial reform priorities on which the two had agreed. The list included protecting taxpayers from financial- services firm bailouts, regulating derivatives, strengthening consumer protections and focusing the Federal Reserve on monetary policy.

“None of those to my mind go to the issue that we’re focused on — fiduciary duty,” Mr. Tittsworth said.

The pace of action in the committee is likely to slow as senators consider the potential impact of Mr. Dodd’s decision, said David Bellaire, general counsel and director of government affairs for the Financial Services Institute Inc., which represents independent broker-dealers.

Sen. Tim Johnson, D-S.D., who likely will succeed Mr. Dodd as chairman of the Banking Committee, is a moderate, pro-business Democrat who was a sponsor of legislation that would create an optional federal charter for insurance.

However, Mr. Johnson doesn’t plan to push the optional federal charter as part of financial services reform, according to his spokeswoman, Julianne Fisher. The senator wants regulatory reform to be passed first, she said: “It’s not something he’s walking away from.”

E-mail Sara Hansard at [email protected].