Sections 913 & 914: Winners and Losers

For one of the first times in the Dodd-Frank debate, House Democrats and financial services industry leaders find themselves on the same side of the debate over harmonization of fiduciary standards for investment advisers and broker-dealers. Meanwhile, as the SEC opens the door for the designation of self-regulatory organizations, House Republicans appear to be at a turning point.

Fourteen months ago, banks were railing against the idea of adopting a single fiduciary standard for both investment advisers and broker-dealers, saying that it paints two very different services with the same brush and harms U.S. firms’ ability to compete worldwide. But in a hearing yesterday, stakeholders appear to have reached a compromise, following the publication of the SEC study, mandated under Section 913 of Dodd-Frank, which called for the development of a fiduciary standard for broker-dealers. The SEC staff recommended harmonizing regulation of investment advisers and broker-dealers and establishing a fiduciary duty for both, but does not subject them both to the Investment Advisers Act of 1940 (“the ’40 Act”), as industry feared. The study also suggests three possible approaches to regulatory reform, including designating self-regulatory organizations (SROs) to oversee broker-dealers.


  • Banks, for their part, got most of what they wanted. The SEC report failed to show any empirical evidence demonstrating a need for the change, and it concluded that subjecting broker dealers to the ’40 Act would be inappropriate, as banks have maintained from the offset.
  • House Democrats appeared pleased with the proposals, which will increase regulation of financial professionals and could open the door for additional funding for the cash-strapped SEC. Further, industry called for any regulatory actions to be performed with strict Congressional oversight, preserving a strong government role in the financial sector for the foreseeable future.


  • The SEC’s report has been criticized by stakeholders on both sides of the debate for failing to include enough empirical evidence of a problem, opening the door for many to criticize regulators for, once again, regulating for regulation’s sake. Further, the commission was lambasted throughout the hearing for its demonstrated inability to carry out its many new responsibilities under Dodd-Frank. When faced with a choice between ceding some authority to FINRA or being tasked with additional regulatory responsibilities it cannot afford, it is tough to see an upside for the agency.
  • The Department of Labor’s proposal to broaden the definition of fiduciary standard to more financial professionals, including those who oversee IRAs, drew criticism from all sides as being ill-conceived and damaging to those who are already struggling to save for retirement in a volatile economic climate.


  • FINRA’s request to be designated as an SRO has the support of House Republicans as well as industry and could be an opportunity to scale back, even slightly, the growing government role in the financial sector and demonstrate that self-regulation can work. On the other hand, as House Democrats appear determined to paint the organization as “the ones that missed Madoff,” regulation could end up in the hands of the SEC.
  • House Republicans maintain that there has not been a demonstrated need for reform and are using the Department of Labor’s proposal as evidence of the Obama Administration’s desire to over-regulate and expand the size of government. However, the reforms seem to be moving forward regardless of the criticisms. The House GOP could score a big win if Financial Services Committee Chairman Spencer Bachus’s (R-AL) proposal to designate FINRA as an SRO becomes law and the private sector is able to regain some autonomy. If not, the SEC’s role will continue to grow and Republicans will face renewed pressure to increase its funding.

The SEC has yet to propose rules related to its study, and Rep. Bachus has not said when his legislation, still in draft form, will be introduced.

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