Financial Services Reform Compromise Reached

Designed with the intention of preventing another market meltdown, protecting consumers from unfair lending agencies, and clarifying and correcting existing legislation, the bill promises significant change to the current practices of retirement plan advisers and financial service providers.  

The Securities and Exchange Commission (SEC) was given the authority to require brokers to put their clients’ interests first, a practice that is familiar to advisers. A six-month study of the brokerage industry, with specific attention paid to possible regulatory gaps or overlaps between brokers and investment advisors, will be conducted before any more significant changes are made. Within the next year, brokers who previously recommended “suitable” investments based on their clients’ financial goals and preferred risk level may be held to the fiduciary standard.  

Under the terms of the legislation, the SEC also has the right to require private equity and hedge fund advisers to open their books for inspection. The SEC’s review may raise the threshold for customers as accredited investors, a designation currently given to “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase,” as well as several other qualified companies and plans¹. 

The bill also created a new Federal Insurance Office within the Treasury that will monitor insurers who were previously regulated only by states. The FDIC’s authority to liquidate failed commercial banks was also extended to large financial firms whose collapse would have a greater negative impact on the economy.  

The bill was expected to be brought to a vote this week, potentially being signed by President Obama by July 4.  However, the passing of Senator Robert Byrd (D-West Virginia) this morning has, at least temporarily, put that timetable, if not the passage of the compromise bill itself, in question.      

^1. For more information on the SEC’s definition of accredited investors, please visit http://www.sec.gov/answers/accred.htm.