| 04 February 2010

Few investors understand the difference between a broker* and a financial adviser. And that's the problem. The two are different and are regulated differently with much of the burden of fiduciary responsibility falling on the financial advisers, unlike what most investors think. Brokers, on the other hand, have been free to sell in a less restrictive environment.

The Senate Banking Committee is putting the final touches on its version of a financial regulatory overhaul bill. As part of that process, the committe must decide what fiduciary responsiblity to assign to brokers and to financial advisers. The Committee has said it is working to stop "questionable sales practices" but some of the earlier proposed language tightening those restrictions may be scrapped or modified.

It was less than a month ago that SEC Chairman Mary Schapiro testified before the Financial Crisis Inquiry Commission (FCIC) on the fiduciary requirements of brokers. "When investors receive similar services from similar financial service providers," said Ms. Shapiro in her testimony, "it is critical that the service providers be subject to a uniform fiduciary standard of conduct that is at least as strong as exists under the Investment Advisers Act, and equivalent regulatory requirements, regardless of the label attached to the service providers."

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Barbara Roper, Director of Investor Protection for the Consumer Federation of America, called on members of the Senate Banking committee to stay strong on the fiduciary provision in the reform bill, news we first heard the news from reporter Sara Hansard at Investment News.

"Responding to a campaign of misinformation and scare tactics by broker and insurance industry lobbyists," said Ms. Roper, "some committee members appear to be leaning toward replacing that provision with a meaningless requirement for a new study." A "requirement for a new study" in this case, is a euphamism for "let's just ignore that one for now."

Texas Securities Commissioner Denise Voigt Crawford agrees with the condemnation and has more pointed criticism for FINRA. "FINRA is spending money on Capitol Hill to really decimate any chance of a meaningful Investment Advisers Act fiduciary standard that would inure to the benefit of individual investors in this country.”

The SEC isn't (necessarily) working against investors on this. But the regulatory slippage occuring could prove more harmful than we originally thought. At issue is whether, since Ms. Shapiro's original testimony and her calls for harmonization, the net result of the legislation -- which is now the byproduct of tremendous lobbying -- will be less than beneficial to investors.

From our perspective, and from what we can tell, FINRA is not lobbying the Hill on behalf of investors, and that is the crux of the problem. As long as we let brokers self-regulate and fund lobbying efforts on behalf of themselves we can be assured of only one thing: the interests of individual investors are not represented.

In other words, we agree with the comments from Ms. Crawford that, "[FINRA's] positions on these issues become quite suspect."





*To avoid confusion, note that in this case "broker" refers to a person, not a firm.