NAIFA GovWatch

NAIFA Analysis of Senate’s Financial Services Overhaul Legislation

Issue: Financial Services Regulatory Reform

Date: May 21, 2010

Action Taken: Last night by a vote of 59-39, the U.S. Senate passed its version of H.R.4173, the Wall Street Reform and Consumer Protection Act. The bill which prior to passage was known as the Restoring American Financial Stability Act (RAFSA) includes several important provisions for NAIFA members. The most notable being the inclusion of a NAIFA-championed and hard fought provision to ensure that any change to the legal duty or “standard of care” governing registered representatives of broker-dealers has been objectively analyzed for both its need and its potential impact on the delivery of financial services.

Standard of Care: One of the most troublesome sections of the original Senate bill would have required all broker-dealers (and their registered representatives) to be subject to all of the requirements of the Investment Advisers Act of 1940 – including the Act’s fiduciary duty. That requirement would have been in addition to the suitability requirements imposed on broker-dealers under the Securities and Exchange Act of 1934. NAIFA rejected this radical and untested approach and instead supported an alternative proposal by Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) to comprehensively study the regulatory environment surrounding investment advisers and broker-dealers. Following the study, the SEC would be directed to write rules to address any gaps or overlap in regulation that are found to be harmful to investors.

Despite overwhelming objections from the Securities and Exchange Commission, financial planning groups, several key Senators, and other advocacy groups, NAIFA through effective grasstops and grassroots efforts, successfully worked with our partners to assure the Senate retained in the bill the objective and fact-based approach to this complex issue.

Read a statement from NAIFA President Tom Currey on the inclusion of the fiduciary duty provision.

Other major provisions of the bill of interest to NAIFA are:

Clarification that the SEC can require new disclosures of broker-dealers. Should the SEC choose to exercise that authority, they must require that broker-dealers provide customers clear, concise and pre-sale disclosures about conflicts of interest. The parameters of what is considered a conflict of interest would be subject to SEC review and should be informed by a required study on what kinds of disclosures consumers want. The disclosures should also be informed by investor testing conducted by the SEC.
The establishment of a NAIFA-supported “Office of National Insurance” to be a source of expertise on insurance (except health insurance) within the federal government. The ONI would not be a new insurance regulator.
The establishment of a new “Bureau of Consumer Financial Protection” within the Federal Reserve. The language of the bill excludes insurance (except for mortgage, title, and credit insurance) from the scope of the Bureau. Persons regulated by the SEC and state securities regulators are also exempt from the Bureau’s authority.
The establishment of a NAIFA supported federal grant program to assist the states in cracking down on the use of misleading and fraudulent marketing practices aimed at seniors.
Requires the Government Accountability Office to study the effectiveness of state and federal regulations to protect consumers from unqualified persons who hold themselves out as “financial planners.”

Complete Analysis: For a complete analysis of all the major provision of the bill, click here to read the memo prepared by NAIFA outside counsel Steptoe & Johnson.

Next Steps: The House and Senate versions of H.R.4173 now need to be reconciled into one piece of legislation and sent back to each chamber for final approval before going to the President for his signature. To review where NAIFA stands on the House bill, please click here.

The conference process is expected to begin soon with House and Senate conferees expected to be announced next week. House and Senate leaders have already stated that it is their goal to finish the bill in June. Of all the provisions of the bill, the only major difference for NAIFA members is the difference on the standard of care issue. Given the two choices, NAIFA prefers the objective approach in the Senate bill. We will now work with our partners to advocate for the Senate language on standard of care to be retained during conference.

NAIFA Staff Contact: Jill Edwards, Assistant Vice President – Federal Government Relations, at jilledwards@naifa.org.

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