Lobbying May Kill Fiduciary-Rules Plan for Brokers (Update1)

Feb. 12 (Bloomberg) -- Lobbying by insurers and banks including Morgan Stanley may result in the elimination of a proposed new standard that would make retail brokers more accountable to their clients.

Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel’s reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there’s need for a new broker standard.

Consumer advocates have pushed for the fiduciary standard, arguing that investors are misled by the adviser title used by thousands of brokers. Investors have difficulty distinguishing between investment advisers and brokers, and most see their brokers as advisers, according to a 2008 Rand Corp. study commissioned by the SEC. Without the fiduciary requirement, brokers don’t have the same accountability for their advice as investment advisers and have more leeway to sell financial products created by their own firms instead of seeking the best investment for the customer.

“Retail investors have suffered incredible losses in the recent crisis,” said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America. “This provision would at least help protect investors against some of the toxic investments they were peddled by their financial advisers.”

Dodd Proposal

The regulatory overhaul approved by the House of Representatives in December included a section that would require a new fiduciary standard for brokers, one that would be defined by the SEC. Consumer advocates say that would likely end up being less onerous than what investment advisers now face.

The original Senate proposal put forward by Connecticut Democrat Christopher Dodd, who heads the banking committee, went further and eliminated the distinction between investment advisers and brokers, bringing them under the same standard.

Dodd withdrew his bill after Republicans opposed it and has been negotiating with them to come up with a bipartisan bill. After discussions with Richard Shelby, the ranking Republican on his committee, collapsed last week, Dodd turned to Senator Bob Corker, a Tennessee Republican, hoping to strike a bipartisan deal on the package.

Insurers Lobby

Life insurance companies, which employ thousands of financial advisers, have led the fight against extending the fiduciary standard to brokers, according to lobbyists involved in the discussions on Capitol Hill. In a Nov. 20 letter to Dodd and Shelby, three trade associations representing such companies urged the senators to drop the section on fiduciary standards.

The National Association of Insurance and Financial Advisors, the National Association of Independent Life Brokerage Agencies and the Association for Advanced Life Underwriting said they represent about 500,000 life insurance agents who would be treated as investment advisers under the proposal originally put forward by Dodd.

Sarah Spear, spokeswoman for AALU, said her organization had no comment beyond its position stated in the letter. Spokesmen for the two other groups didn’t respond to e-mails and phone calls requesting comment.

Morgan Stanley Lobbying

Morgan Stanley, the largest retail brokerage in the U.S. after buying majority control last year of Citigroup Inc.’s Smith Barney unit, has argued that brokers provide different services than investment advisers, according to documents presented by the New York-based firm’s lobbyists to senators and obtained by Bloomberg.

The bank says in 13 pages of talking points and proposed legislative language that “the SEC should be given the responsibility to thoughtfully review brokerage services and regulations, and promulgate new, specifically tailored rules for the brokerage business.”

James Wiggins, a spokesman for Morgan Stanley, wouldn’t confirm that such a document was used in congressional meetings. He said the positions are representative of Morgan Stanley’s stance on the subject.

“The industry has stated clearly that we endorse the creation of a new federal securities fiduciary standard of care,” Wiggins said. Extending the current fiduciary standard that covers investment advisers to brokers would limit firms’ ability “to provide clients with products and services they want,” he said.

Sifma’s Position

That’s the position adopted by the House and advocated by the Securities Industry and Financial Markets Association since last July. Morgan Stanley is a member of Sifma, Wall Street’s largest lobbying group.

“We generally support the House version,” said Kevin Carroll, Sifma’s associate general counsel. “We’d prefer the Senate version look more like the House’s, but if that can’t happen, then the SEC study proposal would be a reasonable way to move forward.”

Julianne Fisher, a spokeswoman for Senator Johnson, who is pushing the SEC study, didn’t return phone calls seeking comment.

According to the existing regulations, investment advisers have a fiduciary duty to put clients’ best interests first. Financial advisers and brokers who are exempt from the rule follow a so-called suitability standard, which means they need only to make sure their recommendation is appropriate for clients’ investment goals.

LPL Financial

Another Sifma member, Boston-based LPL Financial, has also lobbied Dodd and other committee members to accept the House version. Almost all of LPL’s 12,000 financial advisers are registered both as brokers and as investment advisers, according to the firm’s general counsel, Stephanie Brown. She said her company is opposed to another study.

“These lengthy studies are never productive, and the time for change is now, when the momentum is here,” Brown said. “The Rand study has already looked at these issues and should provide the guidance for the reforms needed.”

Letting the SEC come up with a new fiduciary standard for brokers will likely mean a lighter standard that won’t match the accountability of the investment advisers, according to the North American Securities Administrators Association, which represents state regulators of brokerages.

“Everybody keeps saying they’re in favor of a fiduciary standard, but then they keep qualifying what they mean by it,” said NASAA President Denny Crawford. “That is very disingenuous. The existing fiduciary standard is strong enough and shouldn’t be diluted.”

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net