There's nothing like a crisis to bring about change. And as last autumn's existential economic crisis raised a loud hue and cry about the need for wholesale financial services reform, government officials in Washington pledged to rewrite the rules and change the face of financial services as we knew it with the goal of preventing future implosions.

One year later, the reform effort appears to be more rhetoric than reality. With the markets having rebounded smartly and the economy taking baby steps toward recovery, coupled with health care reform becoming the hot potato issue du jour, it seems the financial services debate has stalled.

Nonetheless, reform is pushing ahead. In June, the Obama administration issued its blueprint for reform with an 88-page manifesto entitled Financial Regulatory Reform: A New Foundation. In July, the Treasury Department released its proposed Investor Protection Act of 2009 aimed at implementing some of the ideas in the blueprint. And this autumn, the House Financial Services Committee is working to have a bill in place by year-end so that the Senate can get something passed early next year.

The finished product is likely a long way off, and it isn't shaping up to be as radical as some folks had feared or hoped. Still, the Obama administration's suggested blueprint covers a range of issues running the gamut from addressing the mission of the Securities and Exchange Commission (SEC) and regulating derivatives, to proposing that hedge fund advisors register with the SEC and creating a Consumer Financial Protection Agency to oversee retail financial products such as mortgages and credit cards.

Two issues are of particular interest to financial advisors: whether mandatory arbitration clauses should be eliminated and the call to harmonize the legal standards for SEC-registered investment advisors and broker-dealers. And although it's not explicitly part of the Obama blueprint, one of the big current debates is the long-running issue of who ultimately will regulate investment advisors.

(Dis)Harmonic Convergence
The SEC's reputation was burned by its perceived ineffectiveness in preventing the meltdown and by its failure to catch Bernard Madoff's massive Ponzi scheme. As a result, some people called for the SEC to be dismantled and merged with other agencies.

Clearly, that's not happening. The Obama plan doesn't recommend merging the SEC with the Commodity Futures Trading Commission, as some had suggested. Instead, it directs the agencies to harmonize their regulatory and statutory systems. The plan also recommends expanding the Federal Reserve Board's supervision of the largest financial holding companies and its responsibility to prevent risks that threaten the U.S. financial system. But the SEC's authority would remain largely intact.

The Obama blueprint and the Investor Protection Act want all advisors who give investment advice to be held to the same fiduciary standard, one that would be clearly defined and would put clients' interests first. Currently, SEC-registered investment advisors are required to act as fiduciaries, although there's some flexibility in that standard. On the other hand, advisors at broker-dealers subject to Financial Industry Regulatory Authority (FINRA) oversight are held to a suitability standard that requires them to make recommendations that fit a client's risk tolerance, objectives and financial status. The Obama administration's proposals would authorize the SEC to require all advisors to be fiduciaries, and would prohibit certain conflicts of interest and sales practices not in an investor's best interest. That could result in activities such as underwriting, trading as a principal and sales of proprietary products being more closely scrutinized for conflicts.

"Obama's proposal is what I call a super-fiduciary standard that says firms have to act solely in the interest of their customers without regard to its own financial interests," says W. Hardy Callcott, a partner in the Bingham McCutchen law firm in San Francisco. "That's a higher standard than investment advisors have to live up to today. Investment advisors are allowed to have conflicts of interest, but they have to disclose them in their ADVs, and customers have to consent to them before the account is opened. What I understand is that a lot of people are telling Congressional committees that it [Obama's proposed fiduciary standard] needs to be more flexible because neither broker-dealers nor investment advisors live by that standard."

Nor do they live by a harmonized, or so-called universal standard. "The universal standard of care that would apply to broker-dealers is a critical issue," says Clifford Kirsch, a partner in the law firm Sutherland Asbill & Brennan LLP's financial services practice in New York. "What needs to be determined is the shape it will take and what it will mean for day-to-day operations regarding disclosure and compensation."