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Pyrrhic Victory?

Well, they might have beaten us after all. Just a year and a half after the brokerage industry's reckless sales of packaged subprime mortgages nearly bankrupted the global economic system, a year after these companies were bailed out from the consequences of their own behavior, they've managed to slip enough campaign contributions into the hands of enough Senators to remove the fiduciary obligation from the working draft of the regulatory reform bill.

Senator Chris Dodd, who chairs the Senate Banking Committee, is about to introduce the financial reform legislation with an amendment which basically strips out the idea of requiring a fiduciary obligation, and replaces it with a requirement that the SEC issue a report to Congress within 18 months, identifying any regulatory gaps and overlap in regulation. This amendment was sponsored by Senator Tim Johnson of South Dakota, allegedly as a compromise to buy Republican support for the bill now that the Democrats can't control their own destiny or override a filibuster.

This is obviously an enormous victory for the brokerage industry, which did everything it could to avoid looking like it opposed the fiduciary standard and all the other regulatory stuff in the bill. Instead, the brokerage firms had surrogate organizations and companies lobby hard against limiting their freedom to buy toxic securities from a salesperson masquerading as a trusted advisor, finally (and, apparently, decisively) lining up the insurance industry to fight against the fiduciary provision as well.

Naturally, I hope that everybody reading this will immediately contact your Congressional representatives, especially your Senators. I would tell them that this is a visible sellout to the brokerage industry, which wants to evade having to take direct consequences for its actions, and you hope and expect them to reject that amendment and put fiduciary back into the bill.

But I'm also surprised to realize that I'm not surprised. As I look back on it now, even when it seemed like America was hopping mad at the brokerage firms, even when the chairpeople of FINRA and the SEC were finally drawn into admitting that there should be some kind of (compromised) fiduciary standard for all, even when those firms awarded themselves enormous bonuses at a time of massive unemployment, there was an uneasy sense that Wall Street would eventually be allowed to step in and write its own regulatory rules.

And, in an odd sense, I think this may prove to be a pyrrhic victory–defined as one that ultimately will hurt them more than us, and might even wound them fatally. If things move forward with this new amendment, there will, once again, be a clear dividing line between those who act as fiduciaries and those who continually try to evade this standard, and I think even the press may realize that this new amendment was an act of cowardice on the part of our Congressional representatives. Jason Zweig at the Wall Street Journal has already spoken up; I hope others will as well. If FINRA and the SEC are for fiduciary, who (it's fair to wonder) managed to pull the strings that killed this provision in the final bill? Who has the most to gain? WHY do they have so much to gain from not having to act in the best interests of their customers? These are questions that anybody who wants to see consumers protected can now plausibly ask, and the stinky trail leads straight to the very firms that sold toxic securities, nearly brought down the global markets, triggered this reform legislation in the first place, and were the only ones with something to lose if fiduciary standards were included in the regulations that directly target their activities.

I wonder if that means the SEC, losers of the Merrill Lynch Rule lawsuit, will then have to require brokers to register as RIAs. Or if FINRA will back down from its oversight of the financial planning activities of dually-registered advisors, since the whole fiduciary thing is now kind of out of its orbit.

Mostly, however, I wonder whether this legislative victory will finally motivate all of us, you, me and everybody in the financial planning world, to start talking about this important consumer protection issue with clients, with the press, with friends and family, with your representatives in Washington. I've just written a Client Article on the subject, explaining the issue as clearly as I can in terms I think anybody can understand.

It can be done; we simply, clearly need to help everybody understand who sits on their side of the table and who, stubbornly, still refuses to.