The House Financial Services Capital Markets Subcommittee Holds Hearing on Appropriate Regulatory Oversight of Broker-Dealers
NIBA Industry Alert:
The House Subcommittee held a hearing last Tuesday, September 13 on "Ensuring Appropriate Regulatory Oversight of Broker-Dealers and Legislative Proposals to Improve Investment Adviser Oversight." The witnesses included representatives from the Financial Industry Regulatory Authority (FINRA), state securities regulators, trade groups for advisers, securities brokers and insurance brokers, the SIFMA brokerage association, and a consumer advocate.

The hearing focused on different issues related to brokers and advisers raised by the Dodd-Frank financial reform law, namely: 

1) Creation of a new "uniform" fiduciary standard of care for both registered investment advisers and broker-dealers who currently have a "suitability" standard when giving clients advice. The SEC Section 913 study concluded that most investors could not distinguish between brokers and advisers and recommended imposing a single "harmonized" fiduciary standard for both groups. Both of the SEC's Republican commissioners dissented from the study's findings.

2) Regulating investment advisers. The SEC Section 914 study offered three options: (a) imposing user fees to beef up the agency's examination efforts; (b) establishing an entirely new self-regulatory organization (SRO) to examine advisers; or (c) delegating the task to FINRA, which currently oversees brokers. Full committee Chairman Spencer Bachus (R-AL) last week began circulating a draft bill that would create a new SRO for investment advisers and require advisers who are state-registered to also register with the new SRO. Meanwhile, the Dodd-Frank Act requires state securities regulators to take over from the SEC regulation of investment advisers who manage between $25 million and $100 million and are not registered as broker-dealers, by March 30, 2012. The Bachus plan would thus require the new SRO and the states to share oversight of advisers.

The hearing also addressed the Department of Labor's controversial proposal to create a more restrictive definition of "fiduciary" within the ERISA law for advisers to employee benefit plans. 

Hearing Summary:  Several senior Republicans at the hearing said they did not believe the time was right for the SEC to proceed with expanding the fiduciary standard to brokers and that the SEC study on the fiduciary standard was not backed by empirical evidence. Capital Markets Subcommittee Chairman Scott Garrett (R-NJ) said that "until the SEC comes forward with a reason, backed by real data, that a uniform fiduciary standard is necessary to address an actual problem... I'm not sure why such a rulemaking would be under consideration at this point in time." 

The witnesses differed predictably on the merits of applying such a standard to brokers and whether advisers should be subject to the oversight of an SRO.  Registered investment advisers argued that the SEC remain their regulator and that brokers should be covered by a fiduciary standard of care, while securities and insurance brokers argued the opposite -- the "suitability standard" is adequate and advisers should be examined more regularly by FINRA or other SRO.

FINRA was targeted for its lack of accountability and transparency as a private, industry-sponsored regulator. Pennsylvania securities regulator Steven Irwin strongly urged to FINRA's potential pre-emption stating [t]he prospect of federal pre-emption occurring at the whim of a private corporation such as FINRA, acting pursuant to its authority as a federally designated SRO, is... contrary to the public interest and to basic tenets of democratic society" and "unconscionable." Chairman Bachus said, "If we do enhanced oversight by FINRA and are able to come to a bipartisan agreement [on the bill], there would have to be some role for state regulators and some enhanced oversight and transparency in the case of FINRA." 

Several other witnesses warned that if the new Department of Labor definition of fiduciary for plan advisers is approved, brokers will find their liability risks so broad that they will exit the pension business en masse. Some members called upon the DoL to withdraw the proposed rule and re-propose it altogether with major changes. 


Emily Foshee, NIBA Executive Director
Jim Hock, NIBA Co-Chairman
Raul Rodriguez, NIBA Governmental Affairs Committee Chairman
Michael R. Fugler, NIBA Advisory Committee Chairman