The Senate financial services reform legislation released yesterday would move regulation of RIAs managing less than $100 million from the SEC to the state level, delay regulatory action on applying the fiduciary standard to broker-dealers and layer in some new investor protections that could ultimately reign in some broker-dealer practices.

The reform bill contained few surprises for RIAs. The most clear-cut change – shifting oversight of an estimated 4,000 to 5,000 advisors, or about 75% of the SEC-regulated advisors, to state regulators – was also contained in the House version of reform. If financial services reform ultimately passes Congress and is signed by the president (still a big uncertainty) that provision seems likely to be contained in a final draft.

The cause nearest to the hearts of many RIA advocates – extending the fiduciary standard to broker-dealers – faces an uncertain future in any final reform measure.

The reform bill released by Senate Banking Committee Chairman Christopher Dodd, D-Conn., Monday requires the Securities and Exchange Commission to study regulation of brokers and advisers and report to Congress within a year. It also requires the SEC to adopt rules in two years to address regulatory gaps between brokers and advisers.

Increased SEC oversight

Some other areas of the legislation increase oversight of the SEC, for instance by requiring reports on key areas such as internal controls, personnel management and financial controls, according to Kristina Fausti, director of legal and regulatory affairs for Pittsburgh, Pa.-based Fiduciary360.

But Congress seems to be prepared to punt on the sticky question of how to extend the fiduciary standard to broker-dealers – and perhaps will ultimately leave it up to the SEC. David Tittsworth, executive director of the Investment Adviser Association, has long argued that one of the most important fights for advisors will be fought when the SEC takes up rule-making.

Advisor advocates haven’t given up the fight to sway Senators to add language extending the fiduciary standard contained in the Investment Advisers Act of 1940 to the legislation. It states that advisors must put clients interests first.

“The bill, didn’t have a lot of surprises in it,” said Neil Simon, vice president of government relations for the Investment Advisers Association. While IAA is disappointed that the bill does not require brokers who give advice to come under fiduciary standards, “We’ll be working with the committee to see if we can improve the bill during markup,” he said.

Shoe leather tactics

The Committee for the Fiduciary Standard has been taking the fight to the media, in addition to what Knut Rostad, chairman, calls “shoe-leather tactics” of reaching out to legislators.

Yesterday, the Committee released a list of luminaries that are urging the Senators to include an extension of the fiduciary standard in the reform legislation. They include Vanguard founder John Bogle, Don Phillips, managing director of Morningstar, and George Akerlof and Daniel Kahneman, both Nobel laureates. —. The Committee also said it has sent a request to the heads of all the major banks that include brokerage operations to sign a fiduciary statement endorsing the standard in the Investment Advisers Act of 1940.

Rostad was philosophical about the legislation’s failure to extend the fiduciary standard.
“The significance of this can be seen as a bump in the road,” he said. “The overall movement is in the direction of the fiduciary standard.”

An earlier draft did contain a clear extension of the standard, which the powerful broker-dealer and insurance industry advocates lobbied hard against, saying that the measure would make it difficult to do business. Both industries have embraced the idea of a fiduciary standard – but with adjustments that accommodate their business models better.

Calling for a study

The Financial Services Institute, which represents dually registered broker-dealer/investment adviser firms, issued a statement supporting the provision of the legislation calling for a study. The provision is “a reasonable compromise that will ensure that the interests of all stakeholders in this debate, but most importantly the interests of small investors, are carefully considered before final rules are implemented,” FSI president and chief executive officer Dale Brown said in a statement.

The study will provide valuable insight “because there is no clear consensus in the current debate on the best way to redraw the lines.”

What could potentially change the equation in the Legislature would be greater involvement from the White House. It was an Obama administration proposal in the summer of 2009 that first incorporated the fiduciary standard into the far-larger debate over financial services reform.

A newly muscular White House, emboldened by a health care win, could decide to push for an extension of the standard as part of financial services reform.

“If the White House succeeds in health care, there could be significant implications for financial reform,” Rostad said.

Financial planners

A provision drafted by Sen. Herb Kohl, D-Wisc., which would regulate financial planners for the first time by bringing them under a Financial Planning Oversight Board, is not in the Dodd bill, but Kohl is expected to offer it during the markup Dodd has slated for next week. SEC-registered advisers oppose the provision, which they believe would bring all advisers under the oversight board.

More details over the complex measure will likely continue to come to light in the coming days. Though not the sweeping changes some advisors had hoped for, some of the consumer protection measures may change the way brokers do business.

For instance, according Kristina Fausti, the proposed bill gives the SEC the authority to pass rules for disclosure by broker-dealers to a retail investor before the purchase of an investment product or service by the retail investor.

“This appears to be a pro-investor expansion of the provision beyond just point of sale disclosures for mutual fund purchases,” said Fausti, comparing the current legislation to the draft released earlier by Dodd.

Sara Hansard contributed to this story.