Editor’s note: The story was updated, midday on Tuesday, in the fifth paragraph, to better explain that the language of the draft amendment is ambiguous on the question of what actions or business models would trigger oversight by the new board.

A fiduciary standard is becoming the phoenix of financial service reform.

This time, it’s rising in the form of legislation floated late last week by Senate Banking Committee member Herb Kohl, D-Wisc. The draft amendment to financial services reform legislation would require brokers, RIAs or planners who perform financial planning duties to be regulated by a new board that would promote adherence to a fiduciary standard.

The legislation, which is generating opposition from many quarters, faces an uphill battle. Still, it represents a triumph for the Financial Planning Coalition. The group, which was formed last year, includes the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Planners. Together, they have been pushing against all odds for creation of an oversight body to regulate financial planning. They also are strong supporters of the fiduciary standard.

Apparently, they have found a champion in Sen. Kohl, who plans to offer the draft as an amendment to financial service reform legislation that could be introduced late this week. To see a copy of the draft, click here.

Expands the definition

The draft amendment would, for the first time, make financial planners subject to regulation. It also expands the definition of financial planners to include investment advisers as well as brokers or others who hold themselves out as financial advisors and, in the case of advisors, perform at least two financial planning functions, including investment planning, income tax planning, education planning, retirement planning estate planning and risk management. It’s not clear in the draft exactly what actions would cause an advisor or broker to be considered as holding themselves out as financial planners; indeed, the ambiguity of the language is stirring some of the opposition.

The Financial Planning Coalition says only advisors and brokers who hold themselves out as financial planners would fall under the new board.

“There are people who call themselves financial planners, much like mortgage brokers, who have no way of knowing what kind of standards these people follow,” said a Hill staff member with knowledge of the draft amendment. “There’s an accountability issue.”

All financial planners would be governed by a Financial Planning Oversight Board overseen by the Securities and Exchange Commission. The board would be required to “promote adherence by registered financial planners to a fiduciary standard.” Financial planners would be charged fees to cover the cost of regulation.

Financial planners would be required to disclose conflicts of interest, and compensation received, and the board would have the power to establish qualifications and sanction planners for violations of standards.

Argued for decades

The Consumer Federation of America has not taken a position on the legislation. Barbara Roper, director of investor protection, said, “We’ve argued for decades that the term financial planning should either be defined or regulated. So in that sense it’s consistent with that. But I think on these things the details tend to make a difference.”

The proposal has generated opposition from all quarters. Brokers and insurance groups are reportedly fighting the proposal, according to a knowledgeable source on Capitol Hill. Insurance groups, which have likely succeeded in killing an earlier proposal requiring all brokers who give advice to register as investment advisers, are arguing, along with brokers, that the proposal is a backdoor way to bring them under fiduciary standards, which they oppose. They argue that imposing fiduciary standards would limit consumer choices of products and raise fees to consumers.

State regulators are concerned that the proposal would pre-empt their powers over investment advisers. Sen. Kohl’s staff hopes to address their concerns by making it clear in the language that any complaints filed against investment advisers that act as financial planners would be referred to state securities enforcement authorities.

IAA is also unhappy

The Investment Advisers Association is also unhappy with the proposal because, as it is currently written, it would sweep registered advisers, including SEC-registered advisers who are IAA members, into a common regulatory pool with financial planners.

Under the new definition, approximately 75,000 people would be regulated as financial planners under the draft, according to an estimate by a Hill staffer.

According to a source on the Hill, one measure in the draft is a reaction to the criticism of Financial Industry Regulatory Authority, which is governed by people from the industry it regulates. Members of the Financial Planning Oversight Board could not be members of the industry they regulate, and the board would have to contain at least one state securities regulator and representatives of investor or consumer groups.

If the proposal were to be adopted, an open question is whether the CFP Board would become the FPOB. The CFP Board, which governs Certified Financial Planners, has suggested in the past that it would be a logical body to regulate financial planning.

Protecting seniors

The draft also includes legislation introduced earlier this year by Sen. Kohl, who is also chairman of the Senate Special Aging Committee, that would provide money to states to beef up regulation geared toward protecting seniors.

In order to get the funding, states would have to adopt standards put forward by the North American Securities Administrators Association banning “senior” designations that are not backed by rigorous standards, as well as suitability standards for life insurance and annuity products that are likely to be adopted by the end of the month by the National Association of Insurance Commissioners.