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Retail brokers fear new law could bring sea change
October 30, 2009 / 8:43 PM / 8 years ago

Retail brokers fear new law could bring sea change

By Joe Rauch - Analysis

CHARLOTTE, North Carolina (Reuters) - U.S. brokers and financial advisers fear the business they have known for decades could be irrevocably changed by regulations currently under debate in Congress.

The U.S. House Financial Services Committee is discussing a bill aimed at holding brokers and advisers to a single standard of fiduciary responsibility to clients, amid a public and political backlash at an industry seen as preying upon investors.

A single fiduciary standard would represent the biggest overhaul of the industry’s client responsibilities in decades, affecting roughly 645,000 U.S. investment advisers, according the Financial Industry Regulatory Authority data.

The pending legislation, the Investor Protection Act of 2009, dominated discussions at this week’s annual meeting of the Securities Industry and Financial Markets Association, a leading industry lobbying group.

John Taft, head of RBC Wealth Management’s U.S. operation, who is spearheading SIFMA’s lobbying efforts, called the bill the most important industry issue in the coming year.

“Like it or not, the old model was viewed as conflicted, and in the mind of the public the industry is still commissioned sales people,” Taft said, during a panel discussion.

Securities and Exchange Commissioner Chairwoman Mary Schapiro, the former head of FINRA, said she supported the bill’s proposed fiduciary standard for both advisers and brokers.

“That’s because investors don’t make a distinction between the two, and neither should we,” she said in a speech at SIFMA’s annual meeting.

The pendulum has swung toward more explicit regulation.

“Its a fundamental problem,” said Greg Brown, a University of North Carolina-Chapel Hill professor of finance. “People want to act in their own self-interest as investors, but we find they’re often incapable of doing so as securities have become more complex.”

Rather than oppose new legislation, the industry is merely trying to soften what they perceive as the coming regulatory blow.

“It’s important to be seen as embracing this issue,” Taft said, noting the agency has worked with the congressional committee to get a bill that includes the industry’s perspective.

“We want something, at the very least, that involves all constituents,” he said.


Currently, investment advisers have fiduciary duties to their clients, putting their clients’ best interest first, whereas brokers-dealers are only required to ensure that a product is suitable for the investor.

As drafted, the Investor Protection Act would require both advisers and brokers to adhere to the fiduciary standard.

The bill establishes an Investor Advisory Committee that represents investors’ interests at the SEC, and allows the regulator to curb mandatory arbitration if a dispute arises.

Investor advocates have argued that arbitration panels, rather than formal law suits or other legal remedies, unfairly favors the advisory industry.

The bill would also establish enhanced whistle-blower protections and compensation for providing regulators with information about industry wrongdoing.

But consumer advocates, largely happy with the language in the current bill, say the fight isn’t over.

“We don’t expect the industry or SIFMA to go quietly,” said Barbara Roper, the Consumer Federation of America’s director of investor protection.

Reporting by Joe Rauch, editing by Leslie Gevirtz

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