SENATE PASSES LANDMARK FINANCIAL SERVICES REFORM BILL

Democratic negotiators conceded and removed late on June 29 the $19 billion tax that was designed to help fund the bill and instead opted to fund the Wall Street Reform bill by ending the Troubled Asset Relief Program (TARP) and by charging an extra premium to large banks by the Federal Deposit Insurance Corp. (FDIC). "We end the TARP program immediately," Senate Banking Committee Chairman Christopher Dodd said June 30 on the Senate floor.

Besides establishing a Consumer Financial Protection Bureau (CFPB), a Financial Stability Oversight Council, a Federal Insurance Office in the Treasury Department, an Office of Credit Ratings at the Securities and Exchange Commission (SEC), the reform bill includes a number of changes for the SEC. While Schapiro got the authority that she was seeking to put brokers under the same fiduciary standard of care as investment advisors, the devil is in the details as to exactly how this will take shape.

Schapiro, however, was not granted her request to allow the SEC to be self-funded. Industry observers and even a former SEC Chairman worry that, once again, Congress has left the SEC with inadequate resources by not granting self funding. "I believe the SEC will not receive adequate funding," former SEC Chairman Harvey Pitt told Investment Advisor in an email message.

"Usually, in the face of a crisis of this sort, there is an uptick in SEC funding, but it doesn't last long. As a result of the deletion [of self-funding], the SEC is now, once again, a step-child financial regulator," said Pitt, who's now CEO of Kalorama Partners in Washington.

Kristina Fausti, director of regulatory and legislative affairs for fi360, says that the final conference bill retains the SEC funding appropriations that were set out in the House bill, "and form a baseline of appropriations for the SEC for fiscal years 2011-2015." So this means that the SEC's "budgeted appropriations would double within the next five years as was the case under the House version of the bill.

In addition to this funding, the SEC would also have a 'reserve fund' established in the Treasury, and money for this fund would come from fees collected by the SEC for the registration of securities," she explains.

For each fiscal year, she continues, "the SEC may deposit no more than $50 million into the reserve fund; and the SEC may use no more than $100 million from the fund in any single fiscal year. It appears as though the SEC may use its own discretion as to how to use money from the reserve funds, subject to the $100 million spending limit, but would be required to report to Congress the date, amount, and purpose of any uses of the money from the fund."

While the positive in the funding that was granted "is that the SEC would have the ability to better budget and plan its resources over the next five years," Fausti says, "it is still unclear whether the amount of appropriations will be sufficient for the Commission to accomplish all of its functions, especially given the new authority it is expected to gain and additional studies, reports, and rulemaking it must complete to respond to the new legislation."

What's more, "while the SEC would be able to tap into additional funds from the reserve fund, the limitations on the funding and use of money from the fund could cause a serious impediment for the SEC in times of economic and regulatory crisis. Not to mention the fact that the SEC would be required to forfeit funds to the Treasury that are above the $50 million a year funding limit."

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Read more about the financial reform bill: marketplace winners and losers; impact on advisors, broker/dealers, and banks; the fiduciary standard for brokers; and the history of financial reform.

To see how the securities and brokerage industry is pondering compliance with the reform bill, follow Wealth Manager's Kate McBride's tweets from the SIFMA conference.