“FRANK”LY Speaking,
FINRA provision removed from regulatory reform bill

The House recently passed an extensive financial regulation bill that would significantly increase federal oversight of financial companies and the markets.  Unlike the previous push for deregulation and curbs on private litigation, this legislation expands the government’s role in controlling markets for new securities and limiting the types of systemic risks that set off the financial meltdown in 2008.

This piece of legislation was introduced on the House floor earlier this month by House Financial Services Committee Chairman Barney Frank in an effort to accomplish financial regulatory reform, consolidating the bills approved by his committee in October and November.  Incorporated in the Wall Street Reform and Consumer Protection Act (H.R. 4173) are the following proposals:

• Accountability and Transparency in Ratings Agencies Act, H.R. 3890;
• Consumer Financial Protection Agency Act, H.R. 3126;
• Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269
• Federal Insurance Office, H.R. 2609;
• Financial Stability Improvement Act, H.R. 3996;
• Investor Protection Act, H.R. 3817;
• Over-the-Counter Derivatives Markets Act, H.R. 3795; and
• Private Fund Investment Advisers Registration Act, H.R. 3818;

One of the key provisions of this bill is the Investor Protection Act of 2009, which has a number of provisions changing the federal securities laws including rules surrounding Broker-Dealer Fiduciary Duty.  Currently , the responsibilities of brokers to their customers does not involve the same level of protection as that imposed on investment advisers, who have a fiduciary duty to put the customer’s interest first. What this means is that a broker can recommend investments to a customer without a concern that the broker also receives a benefit from the transaction, such as commissions from a mutual fund company whose shares are recommended. The Investor Protection Act would alter the relationship between brokers and their customers by imposing the higher fiduciary duty standard when personalized investment advice is given. The S.E.C. must adopt rules that require a broker or investment adviser “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” The S.E.C. pushed for this change, and the securities industry has acknowledged the need for change by supporting this higher fiduciary standard. 

Stricken from the Act, with the recent adoption of the Cohen-Frank amendment, was Section 7208 of H.R. 4173, which would have authorized FINRA to inspect and regulate any investment adviser that is “associated” with a broker-dealer.  This provision – added to the Investor Protection Act during its markup – would cover a large segment of investment advisers and open the door to FINRA serving as the self-regulatory organization for all investment advisers.  Rep. Barney Frank had stated that he opposed the FINRA provision and fought to eliminate it.  The fight continues as FINRA remains determined to gain authority over advisers.  Frank commented during the debate on the Cohen-Frank amendment that, “how to best use the resources of FINRA will be high on the agenda of the committee next year.”

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