Consumer groups say brokers may dodge fiduciary requirement

A proposal that would require brokers providing advice to be regulated as registered investment advisers may be dropped from financial reform legislation being considered by the Senate Banking Committee, according to consumer groups and state securities regulators.

Fearing that brokers and insurance groups may persuade members of the committee to support taking a smaller step by commissioning a study of broker-adviser harmonization, the groups held a press conference last week in which they blasted the brokerage and insurance industries, along with the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc.

“In the past week or so, troubling reports have emerged that the committee may be considering eliminating [draft legislation] requirements that brokers that provide investment advice act in the best interests of their clients,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

“Responding to a campaign of misinformation and scare tactics by broker and insurance industry lobbyists, some committee members appear to be leaning toward replacing that provision with a meaningless requirement for a new study,” she said.

The Senate Banking Committee is making final decisions about what provisions will make it into its version of the financial-regulatory-reform bill, which may be marked up at the end of this month.

E-mails to the representatives and staff members for Democrats and Republicans on the Senate Banking Committee received no response.

The groups — the CFA, AARP, Fund Democracy Inc. and the North American Securities Administrators Association Inc. — released a Feb. 2 letter sent to Senate Banking Committee Chairman Christopher Dodd, D-Conn., and ranking Republican Richard Shelby of Alabama, calling for the provision in the earlier draft legislation issued by Mr. Dodd in November to be retained.

The earlier language would make it more difficult for brokers and insurance agents to continue “questionable sales practices,” according to the letter. The groups also pointed to problems with the sale of variable annuities, in particular, as an example of such practices.

“An army of industry lobbyists has descended on the Senate Banking Committee,” trying to convince members that brokers and insurance agents would be unduly burdened by having to act as fiduciaries, Ms. Roper said at the press conference. Contrary to claims by the brokerage industry, requiring brokers giving advice to act as fiduciaries wouldn’t deny investors choice, she said; instead, it would simply “limit the ability of brokers to advise investors to make bad choices.”

“We don’t need another study,” Ms. Roper said. A 2008 study conducted by the Rand Corp. for the SEC concluded that investors are confused by the differences between brokers and investment advisers, she noted.

Texas Securities Commissioner Denise Voigt Crawford, president of NASAA, singled out SEC Chairman Mary Schapiro and Finra for criticism. The SEC head formerly was chief executive of Finra.

“Chairman Schapiro has actually supported a standard of suitability, because she said that the suitability standard was equal to or greater than the Investment [Advisers Act of 1940’s] standard of care,” Ms. Crawford said. Fiduciary standards provide greater consumer protections, she said.

Ms. Crawford, who pointed out that Finra’s members are all brokers, said that “their positions on these issues become quite suspect.”

The Texas securities commissioner added that in addition to millions of lobbying dollars spent by insurance and brokerage firms, “we also have Finra spending money on Capitol Hill to really decimate any chance of a meaningful Investment Advisers Act fiduciary standard that would [work] to the benefit of individual investors in this country.”

Finra spokesman Herb Perone declined to comment.

The SEC didn’t respond to a request for comment.

The position taken by the Securities Industry and Financial Markets Association, favoring a federal fiduciary standard written by the SEC, “is a significant improvement over the status quo, which is an uneven patchwork system,” Kevin Carroll, managing director and associate general counsel at SIFMA, wrote in an email.” wrote in an e-mail.

E-mail Sara Hansard at [email protected].