(Dow Jones) Financial advisors will be affected in several ways by the broad regulatory overhaul of the banking industry approved early Friday by conferees from the U.S. House and Senate. Elements of the sweeping bill affect the terms of their relationships with clients, their business practices and the products they offer. A summary of some of those elements follows.
Investment Advice: Would give the SEC the authority, after some study, to set a higher ethical standard for brokers who give investment advice. Would permit, but not require, the SEC to establish rules holding broker dealers to a fiduciary level of duty similar to that of registered investment advisors. Charging commissions or offering a limited lineup of products wouldn't necessarily violate the new standard, if and when rules are established. But brokers would likely have to review some practices.
Arbitration: Would give the SEC authority to change rules on the use of mandatory securities arbitration agreements, but would not require any changes. The agency would have to determine that any action it decides to take--or not take--serves the public interest and those of investors. Should it limit use of the agreements, advisors could find more of their disputes with investors or employers headed to civil courts, which could mean additional legal costs.
Hedge Funds: Would require hedge funds and private-equity funds to register with the SEC as investment advisors and to provide information on trades. Hedge-fund advisors widely expected the move, and most of those who manage the largest and most reputable funds are already SEC-registered. Those who haven't yet done it would have to fall in line, and increase their compliance obligations.
State Regulation Of Investment Advisors: Registered investment advisors who manage between $25 million and $100 million would be subject to state regulation instead of current SEC oversight. Advisors who are registered in 15 or more states, however, would remain under the SEC's watch. Federal oversight is preferred by many advisors because they would likely face closer scrutiny from state regulators.
Deposit Insurance: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008. This provision could lead clients to keep more savings in banks and less in advisor accounts, although low interest rates could discourage such a tactic.
Pensions: Would give temporary relief to company pensions by letting them take longer to meet funding requirements. This could mean fewer lump-sum distributions, and thus less money that winds up under an advisor's management, as more plans slip below the funding level that allows lump sums.
Insurance: State insurance commissions would continue to regulate equity-indexed annuities rather than the SEC, which made a bid to regulate them as securities instead of insurance products. SEC regulation could have meant new rules on marketing and sales. In terms of overall regulation of insurance products, states would continue to have authorities while a new Federal Insurance Office within the Treasury Department would monitor the industry and study possible changes in regulation.
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