CONGRESSWOMAN ELISE STEFANIK
On Tuesday, October 29, 2013 the House will begin consideration of H.R. 2374, the Retail Investor Protection Act, under a rule. H.R. 2374 was introduced on June 14, 2013 by Rep. Ann Wagner (R-MO). H.R. 2374 was marked up on June 19, 2013 by the House Financial Services Committee and was ordered reported, as amended, by a vote of 44-13. The bill was also referred to the House Committee on Education and the Workforce, which discharged the bill on June 28, 2013.
 Committee Report 113-228 Part 1.
H.R. 2374 prohibits the Department of Labor (DoL) from prescribing any regulation to amend the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) until 60 days after the Securities and Exchange Commission (SEC) issues a final rule relating to standards of conduct for brokers and dealers (“broker-dealers”) pursuant to section 913 of the Dodd-Frank Act. Section 913(g)(1) of Dodd-Frank authorizes, but does not require, the SEC to promulgate rules to extend the fiduciary standard of conduct that is currently applicable to investment advisors to broker-dealers when providing advice about securities to retail customers.
In addition, H.R. 2374 requires the SEC, prior to issuing a rule relating to standards of conduct for broker-dealers, to determine 1) whether the existing unique standards of conduct for broker-dealers and investment advisers are systematically harming or disadvantaging customers; and 2) whether the adoption of uniform fiduciary standards of care would adversely impact customer access to personalized investment advice, recommendations about securities, or the availability of such advice and recommendations. H.R. 2374 further requires that if the SEC promulgates a rule relating to standards of conduct for broker-dealers, it publish in the Federal Register alongside the rule, formal findings that the rule would reduce customer confusion about the standards of conduct for broker-dealers and investment advisers. These provisions would ensure that any SEC rulemaking regarding changes to the standards of care governing broker-dealers and/or investment advisers is necessary.
The SEC regulates the conduct of broker-dealers and investment advisers. “Broker-dealers trade securities for their own account or on behalf of their customers. Broker-dealers typically charge commissions on the trades they execute for their customers. Investment advisers provide advice to clients about the value of securities and the advisability of investing in, purchasing, or selling securities. Investment advisers typically charge an annual fee from their clients calculated as a percentage of the total assets that they manage.”
“Historically, broker-dealers and investment advisers have been held to different standards of conduct in their dealings with customers.” Broker-dealers are held to a “suitability” standard, which requires that they, “when recommending the purchase, sale, or exchange of any security, must have reasonable grounds to believe that the recommendation is suitable for the customer given the customer’s financial status and investment objectives.” Alternatively, “investment advisers are regulated directly by the SEC under a heightened ‘fiduciary duty’ standard of conduct . . . . Under this fiduciary duty standard, investment advisers owe to their clients the affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an obligation ‘to employ reasonable care to avoid misleading’ their clients.”
Although broker-dealers and investment advisers are held to differing standards of care, a 2008 SEC study found that these entities often offer similar services, leading customers to “fail to distinguish broker-dealers and investment advisers along the lines that federal regulations define.” As a result, Dodd-Frank required the SEC to report to Congress on the differing standards of care applicable to broker-dealers and investment advisers. It also authorized, but did not require, the SEC to issue rules to harmonize these deviating standards of care.
In House Financial Services Committee proceedings, experts expressed concern that “[i]mposing a uniform fiduciary standard of conduct on broker-dealers and investment advisers has the potential to disproportionately harm the ability of less affluent retail investors to access personalized investment advice.” In addition, “it [was] unclear . . . whether a fiduciary standard of conduct offer[ed] a superior level of investor protection compared to the standards of conduct applicable to broker-dealers.” As such, H.R. 2374 requires the SEC to ensure that rulemaking regarding changes to the standards of care governing broker-dealers and/or investment advisers is necessary.
Separate from the SEC’s authority to regulate broker-dealers and investment advisers under the federal securities laws, the DoL “is authorized to define when a person, including an investment adviser registered with the SEC, becomes a ‘fiduciary’ under ERISA by reason of providing ‘investment advice’ for a fee or other compensation with respect to ERISA benefit plans or plan participants.” There is concern that inconsistent standards promulgated by the DoL and the SEC governing retirement plan fiduciaries would be confusing and costly for investors and difficult for service providers to follow. H.R. 2374 would reduce the potential for conflict among such related regulations.
 Id. at 2-3 (emphasis added).
 Id. at 3 (emphasis added).
 Id. at 2. These benefit plans include employee pension plans and Individual Retirement Accounts (“IRAs”) which typically invest in securities registered with the SEC.
According to CBO estimates, “implementing H.R. 2374 would not have a significant effect on federal spending. . . . Enacting H.R. 2374 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply.”
1) Reps. Miller (D-CA) and Conyers (D-MI) Amendment #1 – Amendment authorizes the Department of Labor to issue a fiduciary duty rule that protects access to investment education and advice and assures the availability of reasonable compensation to financial service providers. Amendment further requires a study of the effect of current investment industry practices on the standard of care provided to investors by persons providing investment advice, including the effect on low-income investors.
For questions or further information contact the GOP Conference at 5-5107.