NAIFA GovWatch

Senate Committee Approves Financial Services Reform Legislation

Issue: Financial Services Regulatory Reform

Date: March 23, 2010

Action Taken: The Senate Banking Committee (Chairman Chris Dodd, D-CT) last night approved its version of a massive regulatory reform bill on a party line vote of 13-10, with all Democrats voting in favor of the package, and all Republicans voting against the bill.

The bill—entitled the Restoring American Financial Stability Act—was originally introduced by Chairman Dodd in November of last year. The original draft contained provisions of both interest and concern to NAIFA. We are pleased to report that many of the more troublesome aspects of the bill have been addressed in a favorable manner, thanks in no small part to the grassroots efforts of NAIFA members across the federation.

Positive Outcomes: In Chairman Dodd’s November draft of the reform package, Section 913 called for all broker-dealers (and their registered representatives) to be subject to all 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 (and their registered representatives) under the Securities and Exchange Act of 1934. NAIFA rejected such a radical and untested approach and instead supported an alternative bipartisan proposal authored by Senators Tim Johnson (D-SD) and Mike Crapo (R-ID). The Johnson/Crapo proposal requires the SEC to study the regulatory environment surrounding investment advisers and broker-dealers comprehensively, and directs the SEC to write rules to address any gaps or overlap in regulation that are found to be harmful to investors. The Johnson/Crapo proposal is included in the new version of the bill that was approved by the Committee yesterday. Many thanks go to the NAIFA members who responded to the numerous GovAlerts on this issue.

Another provision of concern to NAIFA members was a proposal by Senator Herb Kohl (D-WI) that—in its original form—would have designated “financial planning” as a recognized profession subject to federal regulation and established a new Self Regulatory Organization (SRO) for “financial planners.” This additional layer of regulation would have had a significant impact on NAIFA members, who are already regulated at many levels, including by state insurance commissioners, state securities regulators, FINRA and the SEC, depending on which licenses they hold. Much like the original Section 913 (fiduciary standard) proposal, NAIFA was greatly concerned with this amendment because the issue had not been comprehensively studied by Congress or any federal agency and its full impact on financial professionals – particularly those, like NAIFA members, that are already subject to comprehensive regulation – is unknown. In a tremendous grassroots showing, thousands of NAIFA members contacted Senator Kohl and the rest of their Senators on the Banking Committee asking them to oppose this amendment in its original form. Recognizing that no Congressional Committee or government agency had ever examined this issue, Sen. Kohl recommended that the Banking Committee call instead for a Government Accountability Office study of the issue, which was incorporated into yesterday’s “manager’s amendment.”

Other positive steps the Banking Committee took yesterday include:

Insurance and securities products are now clearly exempted from the scope of the Bureau of Consumer Financial Protection (the Senate bill’s equivalent of the Consumer Financial Protection Agency already approved by the House of Representatives). Senator Kohl should be congratulated for asking for the clarification that insurance products are carved out of this new agency.
The provision to create an office of insurance information (known as the Office of National Insurance in this bill) remains in the current version of the bill. Please note that this office would not exercise regulatory authority over insurers, but rather, would serve in an advisory capacity both domestically and internationally on insurance matters.

Issues of Concern: One new issue of concern was included in yesterday’s bill at the last minute by Senator Mike Bennet (D-CO). The Bennet language clarifies that the SEC has the authority to require broker-dealers to provide presale disclosures to retail investors. The language specifically states that if the SEC mandates disclosure, it shall require disclosure to investors of compensation and any other financial incentive a broker, dealer or financial intermediary may have in connection with the sale of a product. The disclosure requirement must also include a clear and concise summary of the investment objectives, strategies, costs, and risks associated with a sale of a securities product to a retail investor. While the compensation disclosure piece is a troubling development, NAIFA is currently working on a strategy recommendation to tackle the problem.

Next Steps: The bill now moves to the Senate floor, but with the Senate enmeshed in a reconciliation vote on health care reform, floor action on regulatory reform is not expected to take place until after the two week spring recess, which begins March 29 and lasts through April 12. Once the bill hits the Senate floor, hundreds of amendments could possibly be introduced regarding hot-button issues such as the Bureau of Consumer Financial Protection, issues of systemic risk regulation, and resolution authority. The process is far from over, and NAIFA will continue to work on this issue and report on any new developments.

NAIFA Staff Contact: Jill Edwards, Assistant Vice President – Federal Government Relations.

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