What You Need to Know About the Financial Reform Act President Obama signed the Wall Street Reform and Consumer Protection Act (i.e., the Financial Reform Act) into law on July 21, 2010. This new financial regulatory legislation hopes to shore up our financial system and promote growth in the U.S. market by reviving investor confidence and trust. How will the regulations impact you? A uniform fiduciary standard Currently, broker/dealers and investment advisers are held to different standards of customer care; this presents investors with a disadvantage, as it does not allow them to uniformly compare financial services providers. In fact, studies have shown that many investors aren't even aware of the differences between broker/dealers and investment advisers. The SEC is undertaking a six-month study of the various fiduciary standards that exist among broker/dealers and investment advisers. At its conclusion, the SEC will be responsible for writing up a set of standardized rules that are expected to "harmonize" the requirements all financial service providers must follow. The SEC is also expected to make a recommendation to Congress as to who should be designated as the regulatory and supervisory overseer for the financial services industry going forward. Currently, oversight is shared between the SEC and the Financial Industry Regulatory Authority (FINRA), who each have different rules for their respective constituents. The customer comes first Under the Investment Advisers Act of 1940, broker/dealers are held to a suitability standard: Broker/dealers and their representatives are required to provide service that is suitable or appropriate for a client's needs. Under the new legislation, it's expected that broker/dealers will eventually be required to meet a fiduciary standard of care similar to—if not the same as—that of investment advisers. That means putting the needs of the client first and always acting in the client's best interest. The SEC has also been tasked with creating a new consumer protection bureau to help regulate products and services and to ensure that consumers' needs are being met. Financial stability oversight council A new financial stability oversight council will be created to monitor risks that could cause substantial damage to the entire financial system, such as the poor lending standards that contributed to the housing market turmoil. It's unclear who will ultimately be in control of this council: the SEC, which currently governs similar regulatory issues, or FINRA. Regardless of what transpires, we expect that financial professionals—and the financial system—will face increased regulations. Banking and lending Legislation to deter "predatory lending" is in the works. Lenders will be required to verify whether a loan applicant has a reasonable ability to repay the loan; this will include examining income and credit history. Mortgage brokers and loan officers will not be allowed to receive bonuses or higher commissions from lenders for guiding customers into a high interest rate loan. "Balloon payments" will also have new limits on their size and repayment penalties. Banks will be required to hold more reserves to cover potential losses, which will help prevent the need for big bank bailouts. The FDIC insurance limit for deposit accounts has also been raised to $250,000 to help protect individuals' accounts from lender failure. What you can expect The Wall Street Reform and Consumer Protection Act is clearly designed to benefit investors—and to help prevent financial malfeasance (à la Bernie Madoff). In some cases, you may find that it affects your relationship with your advisor. For example, advisors may need to modify their compensation model (i.e., how they charge their clients for services) or the way they approach new relationships (e.g., the type of information they provide at the outset of the relationship, as well as ongoing communication). Or, you may see little obvious change. Keep in mind, the financial industry is full of trustworthy professionals who already put your best interest first! Furthermore, it could take some time for these changes to come to fruition, as the regulatory bodies involved have been given some flexibility in conducting studies, revising rules, and ultimately implementing those rules. What you can expect is a fiduciary standard of care and a regulatory system designed to enhance industry efficiency and protect your best interest as an investor. © 2010 Commonwealth Financial Network