[toeslist] Wall Street-Friendly Democrat Undercuts Financial Reform, Attacks Average Investors
Riaz Tayob
sha...@huffingtonpost.com<mailto:shahien%40huffingtonpost.com> | HuffPost
Reporting
Wall Street-Friendly Democrat Undercuts Financial Reform, Attacks
Average Investors
First Posted: 06-23-10 12:16 AM | Updated: 06-23-10 12:32 AM
The Senate conferees negotiating a final Wall Street reform bill
approved a measure late Tuesday that purports to protect retail
investors yet actually scraps an Obama administration-supported
proposal to protect average investors from unscrupulous brokers on
Wall Street, in a move one dismayed consumer advocate likened to
"false advertising."
The amendment, offered by Sen. Tim Johnson (D-S.D.), undercuts a move
to compel brokers -- middlemen between buyers and sellers of
securities -- to act in the best interests of their clients, in
accordance with what is known as their fiduciary duty.
Investment advisers are bound by this legal obligation, yet brokers
who perform the same function in the employ of big Wall Street firms
like Goldman Sachs are not. Forcing broker-dealers to act in the best
interests of retail investors would not only protect them from Wall
Street's worst impulses; it would level the playing field.
The Obama administration advocated the move last June in its 89-page
blueprint for reforming the nation's financial system. Securities and
Exchange Commission Chairman Mary L. Schapiro supports it, as do
investment professionals and investor groups. The House included it in
its financial reform bill that passed in December. The Senate version,
passed last month, called for a study, punting on an issue that
several Senators attempted to insert into the bill.
But Johnson's amendment, passed on a voice vote, goes beyond the
original simple study the Senate called for last month.
Instead, his provision mandates that the SEC can only extend this
protection to average investors if its study finds that
previously-identified "gaps, shortcomings, or overlap [in the legal or
regulatory standards in the protection of retail customers] cannot be
addressed through disclosure, anti-fraud, conflicts of interest, or
other standards of conduct for brokers, dealers, investment advisers,
persons associated with brokers or dealers, and persons associated
with investment advisers that may be promulgated by the [SEC] or
adopted by national securities associations."
Put another way, the SEC's study has to conclude that essentially
every other imaginable method cannot protect investors before it can
mandate that Wall Street broker-dealers act in their clients' best
interests.
Story continues below
"The Johnson fiduciary duty 'compromise' offers the illusion of
investor protection, but not the reality," said Barbara Roper,
director of investor protection for the Consumer Federation of
America. "The conditions that the agency would have to meet ensure
that any rule it tried to adopt would be tied up in court and would
probably be overturned. In short, this is just another fake fiduciary
duty provision from the Senate."
The requirement attached to the study acts like a "poison pill"
designed to gut the provision, Roper added, given broker-dealers' high
probability of success challenging potential rules in court.
The North American Securities Administrators Association, the National
Association of Secretaries of State, and AARP all support stronger
provisions to protect average investors.
In fact, even Wall Street has indicated its support for a more robust
measure.
"[W]e remain supportive of a new, federal fiduciary standard for
brokers and investment advisers when they are providing personalized
investment advice to retail investors," Andrew DeSouza, a spokesman
for the Securities Industry and Financial Markets Association, a top
trade group, told the Huffington Post in May. Goldman Sachs chief
executive and chairman Lloyd Blankfein expressed a similar position in
January in testimony before the Financial Crisis Inquiry Commission,
the panel charged with investigating the roots of the financial
crisis.
In its blueprint for financial reform, the administration pushed for
the "fair treatment" of investors.
"Retail customers repose the same degree of trust in their brokers as
they do in investment advisers, but the legal responsibilities ... may
not be the same," the report noted. That's why the administration
wants advisers and brokers to be held to the same standard.
Johnson's amendment, though, makes it nearly "impossible" for the SEC
to act, Roper said, adding that his measure does nothing more than
offer "the pretense of trying to solve the problem."
Roper, though, is hopeful that House negotiators will resist the
direction taken by their Senate counterparts. "Fortunately, [Senate
Banking Committee] Chairman [Christopher] Dodd indicated that this
language was still open to negotiation."
But, she added, "it will take major work before it remotely resembles
a provision that investor advocates could support."
And come January, investor advocates won't be able to turn to Dodd,
who will be retiring. Instead, they'll have to appeal to the new
chairman of the Senate Banking Committee -- and if Democrats replace
Dodd on the basis of seniority, that new chairman will be none other
than Tim Johnson.
READ Johnson's amendment:"
http://www.huffingtonpost.com/2010/06/22/tim-johnson-broker-dealers_n_621951.
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