Dodd's Proposed Legislation: What Does it Mean?

Brokers providing investment advice would no longer be exempt from registering as investment advisers under the draft legislation introduced today by Sen. Banking Committee Chairman Christopher Dodd, D-Conn.

Before Dodd... Before Madoff: In the past, the “broker-dealer exemption” in the Investment Advisers Act of 1940 exempted financial advisers if their advice to clients was “solely incidental” to selling products. Dodd's proposed legislation would remove this exemption, leaving these financial advisers open to liability as a fiduciary.

What Does This Mean for Financial Advisers: The proposed legislation gives the SEC the authority to allow brokers who provide advice to conduct principal trades that are otherwise restricted under the Investment Advisers Act. To protect investors from conflicts of interest the SEC would have to determine allowing brokers to conduct such “prohibited transactions” is in the public interest. With the elimination of the broker-dealer exemption, the SEC could increase scrutiny of firms that would otherwise escape adviser registration. The bill would PROTECT investors, but would create higher risk for the financial services industry

Reacting Businesses: The financial services industry has already started pushing back. According to Edward Yingling, president of the American Bankers Association, the bill would produce conflicts among regulators and undermine the state-chartered banking system, while imposing "extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis." All in all, not favored by the industry it is affecting.

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