U.S. House Financial Services Committee Hears Testimony on Harmonized Fiduciary Standards of Care for IAs and BDs, Federal Office of Insurance

Action Taken: The House Financial Services Committee (Chairman Barney Frank, D-MA) held a hearing today to examine two legislative proposals of great interest to NAIFA members. Most notably, the Committee discussed a piece of draft legislation that would impose a new harmonized fiduciary standard of care on both investment advisers and broker-dealers.

The Committee also discussed legislation to create a Federal Insurance Office within the Treasury Department to serve in an advisory capacity on insurance policy matters national and international in scope -- a proposal which NAIFA continues to support.

Background: On Thursday, October 1, 2009 Chairman Paul Kanjorski of the House Financial Services Subcommittee and Capital Markets, Insurance, and Government Sponsored Enterprises released a discussion draft of a revised legislative proposal, known as the Investor Protection Act. The original draft version of the Investor Protection Act was proposed by the Obama Administration as part of their comprehensive regulatory reform overhaul effort.

Chairman Kanjorski’s draft legislation, like the Administration’s proposal, would impose a fiduciary standard of care on broker-dealers and harmonize the standards applicable to investment advisers and broker-dealers. The call for a harmonized fiduciary standard stems from a January 2008 SEC-commissioned Rand report which found that consumers do not clearly understand the differences between investment advisers and broker-dealers. The Rand report also found that investors are generally happy with their advisers and the services they provide. NAIFA believes the latter point is critical to keep in mind as proposals for a uniform standard of care are considered in order that the goal of harmonization does not damage the current, generally successful, nature of existing client-adviser relationships.

Impact on NAIFA Members: This issue is important to us because nearly three-quarters of NAIFA’s members are registered representatives of broker-dealer firms; and many NAIFA members are registered investment adviser representatives. Thus, any statutory or regulatory changes that are put in place will have a significant impact on our membership and on the relationships NAIFA members have with their clients. We are therefore deeply concerned about the application across the board of a yet to be defined fiduciary standard to all persons providing financial advice. The term “fiduciary standard” is subject to a variety of different legal definitions and may impose different obligations under different sets of circumstances. This makes it very difficult to determine with certainty the standard owed by an adviser to a client, particularly given the differing levels of engagement between advisers and clients.

For months NAIFA has been actively meeting with officials with the SEC, FINRA, Members of Congress and their staff, and key industry partners on how best to address this critical issue. As part of those efforts, we recommended specific legislative changes to original Obama Administration's draft proposal. The discussion draft released by Chairman Kanjorski last week reflected some of those changes but there is still much work to be done to ensure a positive legislative outcome.

Update: The hearing brought a number of different industry perspectives to the table, with both regulators and industry representatives testifying. Witnesses generally agreed that a “fiduciary standard” should be applied to both investment advisers and broker-dealers to the extent they are providing personalized investment advice to retail investors. There is, however, a lack of consensus among the witnesses, as well as among the members of the financial services community that did not testify today, about what the definition of “fiduciary” should be and if it can be tailored to reflect the various types of client engagements that exist.

For more information on today’s hearing, including a report of the discussion of a Federal Office of Insurance, please visit:
http://www.naifa.org/advocacy/documents/Report_of_Hearing_on_IPA_FIO.pdf

While NAIFA did not testify at today’s hearing, we submitted a written statement for the record. To view a copy of our statement for the record, please visit: http://www.naifa.org/advocacy/documents/NAIFAIPAandFOIStatement.pdf

Next Steps: Chairman Frank has made no secret that his Committee will have a very full schedule holding hearings and marking up legislation in the coming weeks and months. While Frank has stated that he would prefer to see individual pieces of regulatory reform be taken up separately on the House floor, Majority Leader Steny Hoyer (D-MD) stated today that legislation—including the Investor Protection Act—will be incorporated into a larger regulatory reform package, which will be taken up by the House in November.

NAIFA will continue to work with Chairman Kanjorski and other key members of Congress in order to address our concerns about the draft Investor Protection Act. NAIFA members should be on alert about this critical issue and be prepared to hold district meetings, attend Town Hall meetings, and respond to GovAlerts if that step becomes necessary in order to positively impact this process.