Sunday, July 18, 2010

Senator Johnson Clarifies Compromise on Broker Duty of Care

The current regulatory regime treats brokers and advisers differently and subjects them to different standards of care even though the services they provide investors are very similar and investors view their roles as essentially the same. This regime was established during the New Deal and, although amended many times since, remains rooted in the last century. An ultimate goal of financial regulatory reform has been to allow the SEC to align duties for financial intermediaries across financial products. A corollary of this goal is that standards of care for all brokers when providing investment advice about securities to retail investors should be raised to the fiduciary standard to align the legal framework with investment advisers.

The House bill would have imposed a uniform federal fiduciary duty on brokers and advisers, while the Senate bill directed the SEC to conduct a study on the matter. The House-Senate conference committee struck a compromise, vetted by Senator Tim Johnson, a senior member of the Banking Committee, under which the SEC will conduct a study under what Senator Johnson called strict parameters and the SEC is also authorized to impose a uniform federal fiduciary standard on brokers and investment advisers.

On the day the Senate passed Dodd-Frank, Senator Johnson said that Section 913 reflects a compromise between the House and Senate provisions on the standard of care for brokers, dealers, and investment advisers. It includes the original study provisions passed by the Senate, together with additional areas of study requested by the House--a total of 13 separate considerations and a number of subparts, where we expect the SEC to thoroughly, objectively and without bias evaluate legal and regulatory standards, gaps, shortcomings and overlaps. We expect the SEC to conduct the study without prejudging its findings, conclusions, and recommendations and to solicit and consider public comment, as the statute requires. As Chairman Frank described the compromise when he presented it to the committee, section 913 does not immediately impose any new duties on brokers, dealers and investment advisers nor does it mandate any particular duty or outcome, but it gives the SEC, subsequent to the conclusion of the study, the authority to conduct a rulemaking on the standard of care, including the authority to impose a fiduciary duty. I think this is a strong compromise between the House and Senate positions. (Cong. Record, July 15, 2010, p. S5889).

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