The Anti-Investor Protection Act

[R]ight, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must. Of the gods we believe, and of men we know, that by a necessary law of their nature they rule wherever they can.

In a masterful stroke of political sleight, the brokerage industry has turned the "Investor Protection Act" that is likely to be approved by the Committee tomorrow into an "Anti-Investor Protection Act." The Anti-IPA is a reminder that bringing arguments without muscle to Capitol Hill is a fool's errand.

A Halloween Surprise
The IPA had sailed along since the first of October in the guise of a new and promising fiduciary duty for brokers who provide retail investment advice. It fulfilled President Obama's promise of raising the standard applicable to brokers, which under current law requires only that the products they recommend be "suitable." The "suitability" standard means that often the least suitable of the suitable products is recommended because it pays the broker the highest commission.

The brokers' lobby has long argued against a fiduciary duty and in favor of brokers deciding for themselves what rights their advisory clients should have. For the last few months, however, all indications from the Financial Services Committee were that no one was buying the brokers' pitch.

On the eve of Halloween, the vestal fiduciary virgin's altar was revealed to be a sacrificial one. Brokers had quietly recruited the Committee's ranking member Spencer Bachus to drop the ax on brokers' new fiduciary duty and Committee Chairman Barney Frank appeared to look the other way while holding the chopping block in place. No one watching the execution live in the hearing room could even tell what had happened until the next day, when the actual amendment surfaced. The message from the Committee to financial planners? "Say hello to my little friend, your new regulator."

My Little Friend
The Bachus amendment anoints the Financial Industry Regulatory Authority (FINRA) as the new regulator for most investment advisers and financial planners. FINRA is the membership organization for brokers previously known as National Association of Securities Dealers (NASD). In other words, it is brokers who will be making rules on investment advice provided by investment advisers.

The IPA's initial promise was to raise brokers' standards to the level applied to advisers. The Anti-IPA will lower advisers' standards to the level applied to brokers.

This outcome is no surprise given this matchup between the weak and the strong. The Financial Planning Association and the Certified Financial Planner Board of Standards (CFP Board), which represent the interests of financial planners and whose fiduciary standards demarcate their members from brokers, never stood a chance against the political clout of the brokers' lobbying organizations, FINRA, and the Securities Industry and Financial Markets Association (SIFMA). SIFMA wanted to go even further than FINRA by eliminating brokers' clients' right to sue for fiduciary duty violations. It appears that this proposal will have to wait until the next financial crisis.

The CFP Board moved from Denver to D.C. last year in part to increase its influence on the Hill. Act One of this drama could be entitled: CFP Board Comes to Washington. The idealists' attempt to push for separate regulation of financial planners was promptly crushed under an onslaught launched by insurance lobbyists. When word leaked that Financial Services Committee member Mike Capuano might move to regulate brokers and financial planners separately, the insurance industry quickly issued a call-to-arms to its members to set Capuano straight. Capuano did not wait around for his switchboard to light up with complaints from insurance agents before dropping this hot potato.

Indeed, insurance lobbyists provided particular insight into the ways of Washington. The Association for Advanced Life Underwriting (AALU) argued that imposing a fiduciary duty on brokers would prevent them from charging commissions while knowing full well that brokers subject to a fiduciary duty have been charging commissions for decades. The AALU's most entertaining bit of chicanery has been its proposal to prohibit registered investment advisers from receiving commissions altogether--a proposal that would have prevented many insurance agents who are investment advisers from selling variable annuities and other commission-based securities products.

Talk to Chuck
The AALU's own solicitation for new members reveals one reason why the broker and insurance lobbyists need so desperately to gain control over the fiduciary standard:

Join AALU and you'll benefit from associating with an elite group of sophisticated financial advisors.

Brokers and insurance agents want to continue holding themselves out as "sophisticated financial advisors," financial planners, and financial consultants without being subject to the fiduciary duties that these professional designations imply to clients. The Anti-IPA will codify this regulatory bait and switch. You can "Talk to Chuck" for personalized investment advice, but don't hold him to a fiduciary standard because he's really just a discount broker.

Holding brokers and insurance agents who provide personalized, professional advice to a fiduciary duty would be the right thing to do. But when might makes right, investors stand little chance. Their opposition's desire to "rule wherever they can" would have been all too familiar to Thucydides.

Update: As predicted, the House Financial Services Committee approved the Investor Protection Act Wednesday, Nov. 4. Chairman Frank has indicated, however, that before the Act is voted on by the entire House, he will seek to strip the provision granting FINRA regulatory authority over most investment advisers.