Though Congressional negotiators continued to chip away at financial reform throughout Thursday's conference between the House and the Senate, investors managed to eke out two victories thanks to a handful of key Democrats -- some of whom reversed their earlier, more Wall Street-friendly positions following an onslaught of criticism.
Democrats amended the final reform package Thursday to limit say-on-pay, or annual investor votes on executive compensation; made sure the Securities and Exchange Commission would still be beholden to Congressional appropriations rather than full self-funding through fees; and refused to legislate around a Supreme Court precedent that currently assigns no liability to third-parties, like consultants and accountants, when found to be "abettors of fraud."
But although they took significant losses on the day, investors -- who were outgunned on all fronts coming into Thursday's negotiations -- won for the SEC the authority to apply a fiduciary standard to brokers who provide investment advice to retail investors, as well as the authority to allow investors better access to proxy forms so they can rein in errant company bosses and boards.
These victories stood in stark contrast to a restrictive measure, approved by the Senate conferees earlier in the week, that curbed the SEC's ability to protect average investors from brokers who weren't required to act in their best interests. It also marked a reversal from the measure introduced last week at the behest of the White House by Senate Banking Chairman Chris Dodd (D-Conn.) to restrict shareholders' access to the proxy and thus restrict their ability to limit executive compensation and risk-taking.
Given the mounting wins for Wall Street, investor advocates have been arguing that Democrats were effectively turning a bill designed to strengthen protections for consumers and taxpayers into a bill that was "gutting" post-Enron reforms.
Arthur Levitt, chairman of the Securities and Exchange Commission from 1993 to 2001, wrote in an op-ed for Thursday's Wall Street Journal that the bill is a "sellout of investor interests," full of "many missed opportunities." Levitt called the Dodd proposal on proxy access, which would have limited such access to those investors who controlled at least 5 percent of a firm's shares, "comically useless."
"As a lifelong Democrat ... I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors," Levitt wrote. "It's not."
Referring to Congressional Democrats, Levitt wrote that "these politicians are investor advocates in their press releases alone."
On Thursday, though, Democrats reversed course. House Financial Services Committee Chairman Barney Frank fought back against the push by the Senate, led by South Dakota Democrat Tim Johnson, to essentially prohibit the SEC from compelling brokers to act in retail investors' best interests, otherwise known as being held to a fiduciary standard. Frank won that battle.
Meanwhile, Sen. Charles Schumer (D-N.Y.) and Rep. Maxine Waters (D-Calif.) battled the Dodd- and White House-led provision to limit shareholder input. They won.
After a six-month study of little consequence, the SEC can move to protect average investors from brokers' worst impulses. The agency will also have full authority to implement changes opening up corporate proxies to shareholders, without limits imposed by Congress. The SEC has been considering a 1-percent to 3-percent threshold of stock ownership for investors looking to rein in public companies.
"This was a good day for investors," said Barbara Roper, director of investor protection for the Consumer Federation of America. "The conference just delivered on the top priority for institutional investors ... [and] delivered on the top priority for retail investors ... on fiduciary duty."
The Council of Institutional Investors, a nonprofit association of public, union and corporate pension funds with combined assets that exceed $3 trillion, supports the measure regarding proxy access.
Lynn E. Turner, the SEC's chief accountant from 1998 to 2001, said Levitt's piece had an impact, as did Thursday's revelation that Dodd penned a letter to the SEC in 2007 expressing his opposition to a 5-percent threshold for proxy access -- exactly what he pushed for last week.
Turner cautioned, though, that there will be more fights to come at the SEC when the agency begins to introduce and implement its new rules. "The battle is far from over," he wrote in an e-mail.