AFR to the Senate: Investors Deserve Real Protection

Americans for Financial Reform sent the following letter to members of the Senate Banking Committee, urging them to create real protections for investors:

February 16, 2010

Dear Chairman Dodd, Ranking Member Shelby and members of the Committee:

As you know, legislative language is currently being circulated that would replace the pro-investor provisions of Section 913 of the Restoring America’s Financial Stability Act with new language requiring the Securities and Exchange Commission to study regulatory “gaps and overlaps” between brokers and investment advisers. I am writing to urge you to reject this approach, which would do nothing to ensure that investors who rely on brokers for investment advice receive appropriate protections and would instead waste time and taxpayer money on yet another study of an issue that has already been studied to death. Investors deserve better.

Although the proposed amendment calls for a study, it ignores what years of study have already taught us. It is well established, for example, that investors do not understand the differences between brokers, investment advisers and financial planners and do not realize they are subject to different legal obligations. Focus group testing by the SEC clearly demonstrated that this investor confusion cannot be addressed through disclosure alone. That is why the SEC commissioned the RAND Corporation “to compare the regulatory regimes applicable to investment advisers and broker-dealers and the protections afforded to retail investors by those different regimes” and why it has concluded that the standard for investment advice by brokers needs to be raised.

The proposed amendment would serve as a substitute for Section 913, which is designed to ensure that brokers who give investment advice adhere the same fiduciary duty to act in the best interests of their clients already applicable to investment advisers and financial planners. However, in proposing a new study, the amendment gives scant attention to the issue of what investor protections should apply in these circumstances. To the degree that it raises the issue at all – carefully avoiding the words “fiduciary duty” – it devotes more attention to the impact on brokers than to the impact on investors.

The only investor “concerns” to be addressed by the proposed study are taken directly from misleading industry talking points, which self-servingly suggest that raising the standard for brokers would result in increased costs or reduced investor choice. But we have several decades of experience from the financial planning industry to tell us that combining a fiduciary duty for advice with product sales to implement recommendations has no such ill effects. On the contrary, investors stand to see costs reduced dramatically if brokers are required, as they would be under a fiduciary duty, to take
costs into account when making recommendations. The only products that investors would lose access to under this approach are those that cannot be sold under a “best interests of the client” standard.

A review of the proposed amendment quickly reveals that one purpose of the study is to draw attention to the inadequacy of resources devoted to investment adviser oversight. But we do not need a new study to tell us that Congress has for decades grossly underfunded SEC oversight of investment advisers. A great deal of attention and study was devoted to the issue in the late 1980s and early 1990s, for example, but legislation that would have provided the SEC with needed resources and authority was killed in the Senate in 1994. When the issue arose again in the following session, Congress chose to divide investment adviser oversight between the SEC and the states rather than provide the agency with the funding it needed to fulfill its investor protection mandate. Clearly, lack of adequate regulatory resources is a problem that Congress created, and it is a problem that is well within Congress’s power to solve. Indeed, the funding problem is directly addressed in this legislation. It should not be invoked as an excuse to continue to exempt brokers from regulation under the Advisers Act when they engage in advisory activities.

Finally, the proposed amendment does nothing to enhance the ability of the SEC to respond to any regulatory “gaps or overlaps” it identifies through the required study. Instead, the SEC would be limited to using its existing authority under the Investment Advisers Act and the Securities and Exchange Act to address any such gaps. Where existing authority was inadequate to address the concerns, it could only suggest actions for Congress to take. But if Congress is unwilling to heed the clear recommendation of today’s SEC Chairman that it adopt a fiduciary duty for investment advice by brokers, there is no reason to believe it will be more receptive to a similar pro-investor message two years from now. That suggests that the intent of this amendment is not to improve investor protections but to delay and deflect meaningful reform.

Investors have suffered devastating losses as a result of a financial crisis they did nothing to cause. They are looking to Congress to protect their interests. We urge you to do so by opposing this effort to prevent the adoption of long-overdue reforms.


Barbara Roper
Director of Investor Protection
Consumer Federation of America

Heather Booth
Executive Director
Americans for Financial Reform