Today’s Senate hearing with Goldman Sachs may increase the likelihood that a fiduciary standard for brokers will make it into Senator Christopher Dodd’s financial regulatory reform legislation.

In an antagonistic hearing before Senate Permanent Investigations Subcommittee, Senator Susan Collins, (R, Maine) and other members of Congress grilled Goldman executives concerning the SEC’s fraud charges and suggested that broker/dealers and investment firms should be held to a fiduciary duty when providing investment advice to institutional clients.

“The thing that changed the dynamics is that you have all of these members wondering why Goldman Sachs didn’t have a fiduciary duty in its dealing with institutional clients,” said Barbara Roper, Director of Investor Protections for the Consumer Federation of America, a consumer advocacy group. “In particular Senator Collins, I don’t know how many times she raised the issue of fiduciary duty in her statements and questions today in the hearing. I think that that will have some influence on the debate over the fiduciary duty. I find it hard to believe that Congress would consider adopting a fiduciary duty for sophisticated investors, and then deny that protection for even more vulnerable retail investors,” she said. “Obviously the brokers and insurance agents are never to be counted out and are ginning up their opposition as well, so we’ll see, but the odds are looking better than they were just a short time ago.”

David Tittsworth, executive director of the Investment Advisor Association, agreed that the Goldman case could influence the debate over the fiduciary standard. “The attention on Goldman certainly has brought up questions about ethical behavior, including the fiduciary standard,” he said. “We're hopeful that the focus on these issues may help to convince the Senate to adopt provisions that are stronger than the current study provision.”

In the current version of the reform bill, the SEC would be required to complete a year-long study of whether brokers should be held to a fiduciary duty when providing clients with advice. But senators Daniel K. Akaka (D, Hawaii) and Robert Menendez (D, New Jersey) plan to file an amendment that would replace the current study provision with a fiduciary requirement, applying language used in the House bill. Under the House bill, the SEC would be directed to write new rules requiring all financial advisors, including brokers, to adhere to a fiduciary standard when providing investment advice to retail clients. But that fiduciary relationship would not apply to institutional clients and would not have to be ongoing.

“While the fiduciary debate has centered on retail customers, we have emphasized that the current fiduciary standard under the Advisers Act applies to all clients, whether individual or institutional,” said Tittsworth. “We think it would be a mistake to weaken the current standard or to apply different standards to different types of clients. After all, many ‘institutional’ clients, like some mutual funds or pension funds, are really vehicles established for the benefit of retail investors.”

Republicans blocked Dodd's reform bill from reaching the Senate floor Monday. With a 57 to 41 vote, Democrats fell short of the 60 votes needed to begin debate. However, another vote is likely to occur as soon as Wednesday. And despite bitter partisan squabbling over the legislation, most observers expect that a bill will be passed sometime in the next couple of months. "My prediction would be that there will be legislation the president signs some time in May, or at least in the next one or two months," said Tittsworth.

In the meantime, although the fiduciary question is not one of the most controversial or central issues to the legislation, pressure on the senators from all sides is increasing.

David Bellaire, general counsel and director of government affairs for the Financial Services Institute (FSI), which represents independent broker/dealers, and supports the study, said the group will be watching for an amendment. “We are on guard, keeping an eye out for other attempts to undermine or weaken the study,” he said. “We anticipate letting members of the senate know of our concerns if any amendments like that come forward.” Bellaire said that while past studies, like the Rand study, did a good job identifying the problem with differing regulatory standards for the financial advisory profession, they did not carefully examine the solution. “The study offers the best possible opportunity to develop a solution that address the real investor protection concerns without unintended consequences,” said Bellaire.

Consumer protection and state regulatory groups, meanwhile, are pressuring Dodd to drop the study from the bill and support an Akaka-Menendez amendment. On April 23, the Consumer Federation of America, the National Association of Secretaries of State, the North American Securities Administrators Association and AARP sent a joint letter to Christopher Dodd requesting he co-sponsor the Akaka-Menendez amendment.

“The study language, which would delay reform for several years, replaced a stronger provision that would have required brokers and insurance agents to act in the best interests of customers when recommending securities,” says the letter. “As currently written, the legislation requires the SEC to study and then adopt rules to address ‘gaps and overlaps’ in regulatory requirements for brokers and advisers, but it denies the agency the authority it needs to raise the standards that apply to brokers when they give investment advice to match those that apply to investment advisers providing the same service.”

Even SEC Chairman Mary Schapiro is leaning on Dodd to adopt a uniform fiduciary standard. “Unfortunately, the bill does not establish a uniform fiduciary standard of conduct," Schapiro wrote in a March 22 letter to the senator. "It instead calls on the SEC to study the issue, but does not then give the SEC authority to create a fiduciary standard of conduct for all securities professionals at the conclusion of the study. I urge you to reconsider this approach and provide the SEC the authority it needs to apply a fiduciary standard of conduct to financial professionals. Investors deserve no less.”