Consumers Deserve a Meaningful and Comprehensive Review of Investor Protection Regulations

By Thomas Currey

Insurance agents and financial advisors have observed with some concern proposed Congressional changes to the rules affecting sales of investment products. While the stated intention of these changes is to help consumers, in our extensive experience, they likely will have the opposite effect. 

The changes are part of a proposal embedded within the Senate Banking Committee’s massive draft regulatory reform bill. They would expand the application of the Investment Advisers Act to require all broker-dealers, except for mere order takers, to also become registered and regulated as investment advisers. Doing so would subject broker-dealers to the Investment Adviser Act’s “fiduciary standard” based on the praiseworthy but vague standard that an investment advisor acts in the customer’s “best interest.”

This proposal is a major departure from current law and has never been analyzed to determine if it would provide any greater consumer protection than the current standard that now governs the business transactions between broker-dealers and their customers. That standard is based on the “suitability” of products that meet a customers needs and includes detailed and heavily enforced FINRA consumer protection rules. Suffice it to say, the fiduciary standard did nothing to protect Mr. Madoff’s clients.

Proponents of the rewrite cite a 2008 report by the RAND Corporation as justification for such a radical change. The report examined the differences in business practices between investment advisers and broker-dealers and whether investors understand the legal differences between and relationships among them. Conveniently, proponents ignore one of the primary findings of the RAND report – that most consumers “expressed satisfaction with their own financial professionals.”  While RAND reported that survey respondents expressed confusion about the legal differences in the rules governing the roles of broker-dealers and investment advisers, RAND did not evaluate the regulatory environment policing broker-dealers and investment advisers, and it did not advance the current “fiduciary standard” proposal as a way of addressing consumer confusion.

Registered representatives of broker-dealer firms are currently serving millions of consumers of all income levels across the country. The outcome of this debate will have a significant impact on middle and lower income consumers in terms of consumer protection, as well as access and affordability.  That is why we are urging Congress to go beyond the limited scope of RAND Corporation’s study by mandating a comprehensive review and analysis by the Securities and Exchange Commission to determine the effectiveness of current laws and regulations governing both broker-dealers and investment advisers, and to direct the SEC to review the completed study and promulgate rules and regulations to address any consumer protection gaps in current regulations. The goal of such an analysis and directed regulatory action is to ensure that Congress and the SEC achieve targeted and meaningful reforms without unnecessarily disrupting successful business models that, according to the RAND study, are serving consumers well. 

Thomas Currey, CLU, ChFC, LUTCF, is the President of the National Association of Insurance and Financial Advisors.