Senate Banking Committee Releases Discussion Draft on Financial Reform Legislation

The Senate Banking Committee has released a discussion draft of proposed financial reform legislation (see Investor Protection Act) titled, “Restoring American Financial Stability Act of 2009.” The discussion draft varies from the version recently approved House Financial Services Committee in one key respect: it is better for investors. The Senate version provides wide-ranging protections for investors that are more inclusive than the House approved version.

The difference is best exemplified in certain key reform areas, perhaps most notably in relation to redefining fiduciary duty. Fiduciary duty is simply the duty one owes a client to always invest with the client’s interests being the main concern. Currently there exists a two-tiered system between independent broker-dealers and registered investment advisers. The hope of many is for this system to become more streamlined, and both version attempt to accomplish this.

The Senate discussion draft proposes a simple solution to this problem. The Senate solution is to eliminate the broker-dealer exclusion from the definition of, “investment adviser.” This would make broker-dealers held to the same standards as investment advisers; a definitive win for investors and a vote towards increasing investor confidence.

The House approved version takes a more hands-off approach. Their version would require the Securities and Exchange Commission (SEC) to draft rules to synchronize the current two-tiered system. The likelihood that such a move would create as stringent a standard as the current fiduciary duty to which investment advisers are held is unlikely.

Either version, House or Senate, may become part of the finalized version of the financial reform legislation. It remains to be seen which will win out, but one thing is for sure, the debate will carry on.