U.S. Lawmakers Seek Fiduciary Obligation for Brokers

U.S. lawmakers struggled to agree on how best to make stock brokers and boards of directors more accountable to investors as they worked for a third day to reconcile House and Senate bills on financial regulation.

With some of the most contentious issues yet to be considered, including rules on bank capital standards and derivatives trading, leaders of the House-Senate conference committee today postponed a final decision on whether to impose a fiduciary duty on securities firms dealing with retail customers.

The lawmakers also put off a decision on a plan to give shareholders the right to nominate corporate directors. They neared agreement on a rule that would allow clients to sue accountants, bankers or lawyers who take part in a company’s plan to deceive investors.

In the debate over fiduciary duty, the House side of the conference committee offered a proposal that would require the Securities and Exchange Commission to impose the standard on brokers when they provide “personalized investment advice about securities to a retail customer.” The proposal would allow the SEC to extend the obligation to other customers.

“I cannot foresee us giving in on fiduciary responsibility for individual investors,” Representative Barney Frank, a Massachusetts Democrat who is leading the negotiations, told reporters today.

The standard, which currently applies to money managers, would require brokers selling stocks and bonds to act in clients’ best interests and disclose all conflicts of interest.


Consumer advocates have argued that the fiduciary obligation is needed because individual investors can be misled into buying products they don’t understand and are often confused by the various titles used by financial advisers.

The Senate last month approved legislation that would direct the SEC to study the fiduciary standard, which was opposed by financial companies including Morgan Stanley. Senate Banking Committee Chairman Christopher Dodd said he’ll work with Senator Tim Johnson, a South Dakota Democrat, to craft a counteroffer to the House, which they’ll present as early as tomorrow.

“Whether or not we have a big argument depends on what they come back with,” Frank said.

Recent Cases

SEC Commissioner Luis Aguilar argued in an April 29 speech that the standard should also apply when brokers are selling securities to sophisticated clients such as banks and pension funds. “Recent commission enforcement cases” demonstrate that all investors need the protection, Aguilar said.

Goldman Sachs Group Inc. was accused by the SEC on April 16 of selling a mortgage-backed security without disclosing that Paulson & Co., the hedge fund run by John Paulson, helped pick the underlying assets. Paulson was betting the security would fail, the SEC said. New York-based Goldman Sachs said the case has no merit.

Senators today also moved to dilute a plan that would make it easier for shareholders to oust corporate directors.

The House and Senate measures would authorize the SEC to let investors include their nominees on company ballots used to elect board members. Senate negotiators proposed that the so-called proxy access provision be limited to shareholders who own 5 percent of a company for two years.

The Council of Institutional Investors said in a January letter to the SEC that even if the 10 largest pension funds aggregated their stock, they wouldn’t be able to meet a 5 percent threshold.

‘A Real Angst’

Frank said disagreement over the measure continues. “There’s a real angst on our side about this 5 percent limit on proxy access,” he said.

In a victory for accountants, bankers and lawyers, Senate lawmakers rejected a House amendment that would have allowed shareholders to sue outside businesses that participate in a company’s scheme to defraud investors. Senators offered instead to direct the Government Accountability Office to study the costs and benefits of creating a private right of action against so-called aiders and abettors of securities fraud.

House members had approved the change proposed by Representative Maxine Waters, a California Democrat. Currently, only the SEC has authority to sue aiders and abettors. The U.S. Supreme Court in 2008 restricted shareholder suits against business partners.

Waters appears to be “acquiescing in a study” with some stipulations, Frank said.


In other action, House lawmakers proposed language that would spare small companies the costs of complying with audit rules in the Sarbanes-Oxley Act. The plan would exempt companies with market values below $75 million from a requirement that auditors assess whether they have adequate safeguards to prevent financial misstatements and fraud.

House lawmakers also want the SEC to study ways to reduce audit fees for companies with market values between $75 million and $250 million that are already complying with Sarbanes-Oxley, which Congress approved in 2002 in response to accounting frauds at Enron Corp. and WorldCom Inc.

House Democrats rejected a proposal by Representative Scott Garrett, a New Jersey Republican, that would have prevented the SEC from determining its own funding needs. Senate negotiators are developing a counteroffer on the proposal to allow the SEC to fund itself that they will present tomorrow, Dodd said.

‘Very Concerned’

“I’ve got members who are very concerned about it,” Dodd told reporters after today’s meeting.

The SEC has fought for self-funding authority, arguing that congressionally approved budgets make it difficult for the agency to hire adequate staff and purchase the technology it needs to keep pace with Wall Street innovations.

Garrett said lawmakers should continue to determine the SEC budget to keep tabs on an agency that has failed in regulating the financial industry.

The Senate also rejected a House proposal to hold shareholder votes on so-called golden parachute pay packages.

The House and Senate are finishing legislation designed to address an economic collapse that led to the failure of Lehman Brothers Holdings Inc. and pushed the U.S. banking industry to the brink of collapse. The measures would create a mechanism for winding down systemically risky financial firms, a regulatory structure for the derivatives market and a new federal bureau responsible for overseeing and regulating consumer financial products such as mortgages and credit cards.

*T *T

Before it's here, it's on the Bloomberg Terminal. LEARN MORE