House Financial Services Committee Chairman Barney Frank successfully fought back Thursday against a Senate proposal that would have scrapped an Obama administration-supported measure to protect Main Street investors from unscrupulous brokers on Wall Street.
The Senate proposal, pushed by Sen. Tim Johnson, Democrat from South Dakota, called for a study to examine whether brokers -- middlemen between sellers and buyers of securities -- should act in the best interests of their clients when peddling securities and investment advice. Investment advisers are held to this standard, known as a fiduciary duty. Yet brokers for Wall Street firms, even when performing the exact same function, currently are not.
Johnson's measure, though, went a bit further by also setting a high bar for the Securities and Exchange Commission to clear in order to actually implement new rules aimed at protecting retail investors. In short, the SEC would have to determine that virtually every other alternative to protecting average investors from broker-dealers is inadequate before the agency would be allowed to level the playing field between brokers and advisers, and protect retail investors.
Investor advocates blasted Johnson, and the Senate conferees negotiating the final financial reform bill, for adopting the proposal late Tuesday.
Frank, however, was able to persuade Johnson and his Senate colleagues to support the House version of the same provision. Conferees from both chambers adopted the measure, ensuring its place in the final bill.
Frank's proposal also calls for a study, to be conducted over six months, yet allows the SEC to work on developing new rules while simultaneously studying the issue. So while the SEC is conducting its study it can also work on developing the new rules and all that entails federal agency rule-making, like holding hearings, conducting analysis and soliciting public comment.
At the end of that six-month period, the SEC can then quickly issue the new rules. The only caveat is that the rules would have to incorporate the findings of the study.
The compromise brokered by the Massachusetts Democrat ensures that the issue will be studied -- a priority of Johnson's -- while also giving federal securities regulators the authority to protect investors on Main Street.
SEC Chairman Mary L. Schapiro has already publicly supported such a new rule; two fellow SEC commissioners also are known to support subjecting brokers to a fiduciary standard. Together they form a majority on the SEC's board, perhaps ensuring the final rule's passage.
In addition to Schapiro, investment professionals and investor groups, the North American Securities Administrators Association, the National Association of Secretaries of State, AARP and the Consumer Federation of America also support the measure.
The Obama administration advocated compelling brokers to act in retail investors' best interests last June in its 89-page blueprint for reforming the nation's financial system.
The House included it in its financial reform bill that passed in December. The Senate version, passed last month, called for a study.
"Chairman Frank said at the start of this process that fiduciary duty was a priority for him, and he really came through," said Barbara Roper, director of investor protection for the Consumer Federation of America. "The final agreement fully addresses the concerns we had raised about the Senate offer.
"It provides the SEC with full authority to impose the Advisers Act fiduciary duty on brokers when they give investment advice, and it removes the impediments that would have prevented the agency from doing so. This is a major win for investors on an issue that has been a priority for literally decades," Roper continued.
She added: "It is a real achievement that Chairman Frank was able to bring this over the finish line, and we are grateful that Sen. Johnson was willing to agree to the compromise and allow this to move forward.
"Now it will be up to the SEC to ensure that this is implemented in the way investors deserve. For that to happen, Chairman Schapiro will need to ride herd on SEC staffers who have previously sunk efforts to strengthen investor protection in this area."