House and Senate Conferees Reach Agreement on Fiduciary Standard of Care Issue
Issue: Financial Services Regulatory Reform
Date: June 24, 2010
Action Taken: House and Senate negotiators working to resolve their different versions of “Wall Street Reform” legislation reached a final agreement today on a key provision regarding the question of whether broker-dealers and registered representatives should be held to the same fiduciary standard of customer care as investment advisers when they provide advice to clients.
The Issue: Throughout the lengthy process of drafting comprehensive financial services regulatory reform legislation, one major sticking point involving insurance agents and financial advisors has been a provision—originally contained in both the House and Senate versions of legislation—which called for broker-dealers and their registered reps to be held to the same harmonized “fiduciary duty” as investment advisers. The rationale behind the idea is a belief by some groups that broker-dealers should be held to the same “best interest” standard that investment advisers have when they provide advice to a client.
NAIFA strongly supports robust consumer protections, but we expressed significant concerns about applying an ill-defined “best interest” standard to broker-dealers and reps who sell products. The problem is a legal debate over how a “best interest” standard will be interpreted by any securities regulator at any point in time, i.e. is “best” the cheapest product? The one with the best carrier rating? The best historic underwriting and service standards? The best premium relative the benefit of the product? NAIFA also had serious concerns that registered representatives who are contracted to sell proprietary products and receive commissions could be placed in an untenable legal situation to comply with the standard.
Legislative Background: The version of the bill that passed the House of Representatives last December established a harmonized “best interest” standard for broker-dealers (including registered reps) and investment advisers. Due to NAIFA’s hard-fought efforts, the “best interest” standard in the House bill was amended to clarify that individuals would not be held in violation of the standard simply because they sell proprietary products or receive commissions. NAIFA, however, remained concerned about the uncertain nature of how our members would comply with a “best interest” standard without being subject to never-ending second-guessing by regulators as to whether the “best” product was the one recommended at the time of sale.
The version of the bill that passed the Senate in March took a different approach from the House. Due to NAIFA’s outstanding concerns about the House language, we worked with our industry partners, particularly AALU, to urge the Senate to first consider whether a “best interest” standard for brokers, dealers, and their reps would provide any meaningful enhanced investor protections – or instead if it would just create the optics of investor protection while not addressing any real problems in the marketplace.
The original Senate proposal would have essentially required all registered reps who provide a scintilla of advice to clients to become registered as investment advisers and be subject to all of the requirements of the Investment Advisers Act – including the Act’s fiduciary duty. NAIFA therefore supported an effort by Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID) to have the Securities and Exchange Commission comprehensively study how the current obligations of broker-dealers are applied and enforced relative to the fiduciary duty governing investment advisers.
The study also requires the SEC to consider how changing the standard of care regulations for broker-dealers could impact the availability and affordability of financial services to lower and middle income Americans who usually cannot afford the services of an investment adviser. After the study is complete, the SEC would be granted rulemaking authority to address any gaps or overlaps in regulation found -- the goal of which is to enhance investor protections. Due in large part to NAIFA and AALU’s efforts, Sens. Johnson and Crapo’s study and rulemaking proposal replaced the Senate’s original language.
Outcome: After nearly 18 months of discussion and debate, an agreement was reached today to bring together the differing House and Senate proposals. The compromise language states that:
- The SEC will still conduct the study in the Senate bill and must report to Congress in 6 months.
- The SEC is given the authority to implement a “best interest” standard for broker-dealers, and investment advisers. The “best interest” standard only applies to “personalized investment advice about securities” and the duty does not continue beyond the advice.
- Unfortunately there is no specific requirement that the application of a “best interest” standard be tied to the findings of the study.
- The commission and proprietary product safe harbors NAIFA obtained last year were retained in the “best interest” standard.
Next Steps: Conferees are working to wrap up final negotiations on the overall legislation today and are expected to vote on their final agreement tonight. The bill will then move to the House and Senate floors for approval by the full Congress. The plan is to have the bill placed on the President’s desk before the Fourth of July recess. NAIFA will keep you informed of its progress.
NAIFA Staff Contact: Jill Edwards, Assistant Vice President, Federal Government Relations
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Action Taken: House and Senate negotiators working to resolve their different versions of “Wall Street Reform” legislation reached a final agreement today on a key provision regarding the question of whether broker-dealers and registered representatives should be held to the same fiduciary standard of customer care as investment advisers when they provide advice to clients.
The Issue: Throughout the lengthy process of drafting comprehensive financial services regulatory reform legislation, one major sticking point involving insurance agents and financial advisors has been a provision—originally contained in both the House and Senate versions of legislation—which called for broker-dealers and their registered reps to be held to the same harmonized “fiduciary duty” as investment advisers. The rationale behind the idea is a belief by some groups that broker-dealers should be held to the same “best interest” standard that investment advisers have when they provide advice to a client.
NAIFA strongly supports robust consumer protections, but we expressed significant concerns about applying an ill-defined “best interest” standard to broker-dealers and reps who sell products. The problem is a legal debate over how a “best interest” standard will be interpreted by any securities regulator at any point in time, i.e. is “best” the cheapest product? The one with the best carrier rating? The best historic underwriting and service standards? The best premium relative the benefit of the product? NAIFA also had serious concerns that registered representatives who are contracted to sell proprietary products and receive commissions could be placed in an untenable legal situation to comply with the standard.
Legislative Background: The version of the bill that passed the House of Representatives last December established a harmonized “best interest” standard for broker-dealers (including registered reps) and investment advisers. Due to NAIFA’s hard-fought efforts, the “best interest” standard in the House bill was amended to clarify that individuals would not be held in violation of the standard simply because they sell proprietary products or receive commissions. NAIFA, however, remained concerned about the uncertain nature of how our members would comply with a “best interest” standard without being subject to never-ending second-guessing by regulators as to whether the “best” product was the one recommended at the time of sale.
The version of the bill that passed the Senate in March took a different approach from the House. Due to NAIFA’s outstanding concerns about the House language, we worked with our industry partners, particularly AALU, to urge the Senate to first consider whether a “best interest” standard for brokers, dealers, and their reps would provide any meaningful enhanced investor protections – or instead if it would just create the optics of investor protection while not addressing any real problems in the marketplace.
The original Senate proposal would have essentially required all registered reps who provide a scintilla of advice to clients to become registered as investment advisers and be subject to all of the requirements of the Investment Advisers Act – including the Act’s fiduciary duty. NAIFA therefore supported an effort by Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID) to have the Securities and Exchange Commission comprehensively study how the current obligations of broker-dealers are applied and enforced relative to the fiduciary duty governing investment advisers.
The study also requires the SEC to consider how changing the standard of care regulations for broker-dealers could impact the availability and affordability of financial services to lower and middle income Americans who usually cannot afford the services of an investment adviser. After the study is complete, the SEC would be granted rulemaking authority to address any gaps or overlaps in regulation found -- the goal of which is to enhance investor protections. Due in large part to NAIFA and AALU’s efforts, Sens. Johnson and Crapo’s study and rulemaking proposal replaced the Senate’s original language.
Outcome: After nearly 18 months of discussion and debate, an agreement was reached today to bring together the differing House and Senate proposals. The compromise language states that:
- The SEC will still conduct the study in the Senate bill and must report to Congress in 6 months.
- The SEC is given the authority to implement a “best interest” standard for broker-dealers, and investment advisers. The “best interest” standard only applies to “personalized investment advice about securities” and the duty does not continue beyond the advice.
- Unfortunately there is no specific requirement that the application of a “best interest” standard be tied to the findings of the study.
- The commission and proprietary product safe harbors NAIFA obtained last year were retained in the “best interest” standard.
Next Steps: Conferees are working to wrap up final negotiations on the overall legislation today and are expected to vote on their final agreement tonight. The bill will then move to the House and Senate floors for approval by the full Congress. The plan is to have the bill placed on the President’s desk before the Fourth of July recess. NAIFA will keep you informed of its progress.
NAIFA Staff Contact: Jill Edwards, Assistant Vice President, Federal Government Relations
Back to NAIFA GovWatch
Print this page Email this page
NAIFA, 2901 Telestar Court, Falls Church, VA 22042-1205 | 877-866-2432 |
membersupport@naifa.org
Home | Contact Us | Legal Notices | Privacy Policy | Email Help Center | Staff Webmail
Copyright © 2011 National Association of Insurance and Financial Advisors. All Rights Reserved.