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Wall Street-Friendly Democrat Undercuts Financial Reform, Attacks Average Investors


First Posted: 06/23/10 01:16 AM ET Updated: 05/25/11 05:50 PM ET

The Senate conferees negotiating a final Wall Street reform bill approved a measure late Tuesday that purports to protect retail investors yet actually scraps an Obama administration-supported proposal to protect average investors from unscrupulous brokers on Wall Street, in a move one dismayed consumer advocate likened to "false advertising."

The amendment, offered by Sen. Tim Johnson (D-S.D.), undercuts a move to compel brokers -- middlemen between buyers and sellers of securities -- to act in the best interests of their clients, in accordance with what is known as their fiduciary duty.

Investment advisers are bound by this legal obligation, yet brokers who perform the same function in the employ of big Wall Street firms like Goldman Sachs are not. Forcing broker-dealers to act in the best interests of retail investors would not only protect them from Wall Street's worst impulses; it would level the playing field.

The Obama administration advocated the move last June in its 89-page blueprint for reforming the nation's financial system. Securities and Exchange Commission Chairman Mary L. Schapiro supports it, as do investment professionals and investor groups. The House included it in its financial reform bill that passed in December. The Senate version, passed last month, called for a study, punting on an issue that several Senators attempted to insert into the bill.

But Johnson's amendment, passed on a voice vote, goes beyond the original simple study the Senate called for last month.

Instead, his provision mandates that the SEC can only extend this protection to average investors if its study finds that previously-identified "gaps, shortcomings, or overlap [in the legal or regulatory standards in the protection of retail customers] cannot be addressed through disclosure, anti-fraud, conflicts of interest, or other standards of conduct for brokers, dealers, investment advisers, persons associated with brokers or dealers, and persons associated with investment advisers that may be promulgated by the [SEC] or adopted by national securities associations."

Put another way, the SEC's study has to conclude that essentially every other imaginable method cannot protect investors before it can mandate that Wall Street broker-dealers act in their clients' best interests.

"The Johnson fiduciary duty 'compromise' offers the illusion of investor protection, but not the reality," said Barbara Roper, director of investor protection for the Consumer Federation of America. "The conditions that the agency would have to meet ensure that any rule it tried to adopt would be tied up in court and would probably be overturned. In short, this is just another fake fiduciary duty provision from the Senate."

The requirement attached to the study acts like a "poison pill" designed to gut the provision, Roper added, given broker-dealers' high probability of success challenging potential rules in court.

The North American Securities Administrators Association, the National Association of Secretaries of State, and AARP all support stronger provisions to protect average investors.

In fact, even Wall Street has indicated its support for a more robust measure.

"[W]e remain supportive of a new, federal fiduciary standard for brokers and investment advisers when they are providing personalized investment advice to retail investors," Andrew DeSouza, a spokesman for the Securities Industry and Financial Markets Association, a top trade group, told the Huffington Post in May. Goldman Sachs chief executive and chairman Lloyd Blankfein expressed a similar position in January in testimony before the Financial Crisis Inquiry Commission, the panel charged with investigating the roots of the financial crisis.

In its blueprint for financial reform, the administration pushed for the "fair treatment" of investors.

"Retail customers repose the same degree of trust in their brokers as they do in investment advisers, but the legal responsibilities ... may not be the same," the report noted. That's why the administration wants advisers and brokers to be held to the same standard.

Johnson's amendment, though, makes it nearly "impossible" for the SEC to act, Roper said, adding that his measure does nothing more than offer "the pretense of trying to solve the problem."

Roper, though, is hopeful that House negotiators will resist the direction taken by their Senate counterparts. "Fortunately, [Senate Banking Committee] Chairman [Christopher] Dodd indicated that this language was still open to negotiation."

But, she added, "it will take major work before it remotely resembles a provision that investor advocates could support."

And come January, investor advocates won't be able to turn to Dodd, who will be retiring. Instead, they'll have to appeal to the new chairman of the Senate Banking Committee -- and if Democrats replace Dodd on the basis of seniority, that new chairman will be none other than Tim Johnson.

READ Johnson's amendment:


Sen. Tim Johnson's amendment on fiduciary duty

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