On Friday, the House rewrote the rules governing banks, investment advisers, lenders, and other major players in the financial markets. But along the way, they may have managed to screw a bunch of Girl Scouts out of some merit badges.
The primary purpose of the bill, which has yet to be taken up by the Senate, is to spawn a new bureaucracy: the Consumer Financial Protection Agency (CFPA). That agency, part of President Barack Obama's proposal for reform in the wake of the financial crisis, snags powers from the Securities and Exchange Commission, the Federal Reserve, and other existing agencies, and supercharges them. Charged with regulating "financial advice" of all kinds, the massive mandate of the CFPA includes "educational courses," such as the financial literacy program offered by the Girl Scouts, where girls earn badges for learning how money works.
Assuming you think 1,279 pages [PDF] of new regulations on financial institutions are a good idea, Rep. Barney Frank (D-Mass), chairman of the House Financial Services Committee, and his coauthors had no choice but to include nonprofits in the mix. A loophole for all nonprofits begs today's for-profit financial advisers to become tomorrow's nonprofit financial advisers—who just happen to have close ties to a bank. Money has a way of flowing around rules (remember campaign finance reform?) so the bill's authors couldn't let nonprofits off the hook.
But there's another dynamic at work as well. In addition to going soft on drugs, crime, and their wives, congressmen now have to worry about appearing to go soft on nonprofits, thanks to the political and financial mess created by the nonprofit ACORN earlier this year.
The first public version of the Wall Street Financial Reform and Consumer Protection Act was sloppily written and even more sweeping. The language suggested that even incidental financial advice, discussion, or suggestions from nonprofits would be regulated by the new all-powerful agency. As the bill struggled through the House process, exceptions for small banks, accountants, real estate brokers, car dealers, and pawn shops were inserted.
Sandra Swirski, the executive director of the Alliance for Charitable Reform, fought for another exception as well: charities. "We became concerned because financial activity is defined broadly," she says. "It could capture a small solicitation at the bottom of a college brochure to alumni, foundation advice to grantees, and other day-to-day garden variety financial information." Her group helped move an amendment to protect "any activities related to the solicitation or making of voluntary contributions to or through a tax-exempt organization." This means it's still safe to beg for money and then advise people about the best way to give.
But charities that give financial advice and counsel as part of their mission—like the Girl Scouts—remain exposed to the new regulatory agency under the "educational courses" language.
In a classic congressional round of kick-the-can, the newly created regulatory body will have a significant amount of discretion in how to interpret that language. "There is sufficient authority given to the regulators to allow them to discern about whether they want to include all nonprofits," says Swirski. And it's quite likely that they'll leave the Girl Scouts and others like them alone. And after all, the last thing this country needs is more financially illiterate Girl Scouts roaming the streets, right? That system will work out just fine, of course, until someone who got bullied by a Brownie in a beanie becomes the head of the new agency. And then it's goodbye to the Business-Wise badge, the Dollars and Sense award, and the Money Sense badge. Incidentally, the Girl Scouts Money Smarts program is co-sponsored by Morgan Stanley. That arrangement, and many others like it, may not be long for this world once the bill passes either.
Another goal of the bill is to regulate payday lenders (much more on that here). But the bill may actually wind up being harder on their competitors, the kind of nonprofit alternatives that President Obama and the authors of the bill have long favored over the "predatory" lenders. That's because Goodwill, tax-exempt credit unions, and others elbowing in on the payday lending game often pair their lower-interest loans with mandatory financial literacy education. None of those activities are currently exempted from the raft of regulations, reporting requirements, and other rules in the bill.
The Senate version of the bill will probably make it onto the very crowded docket of the World's Greatest Deliberative body early in the New Year. Swirski said she was optimistic that the protection for solicitation of charitable donations would make it into the final version of the bill, but that "we're much farther behind" on protecting financial literacy education and other mission-related financial advice given by nonprofits. The CPFA itself remains extremely controversial, with House Democrats narrowly defeating an amendment that would have killed it in their version of the bill, so passage in the Senate will be tough.
As such laws often do, the proposed rules and regulations would may a double purpose: While increasing regulation, it also adds another layer of protection for established players in the financial services industry. The language of the bill includes a ban on giving investment advice, "excluding an investment adviser that is a person regulated by the Commodity Futures Trading Commission, the Securities and Exchange Commission, or any securities commission (or any agency or office performing like functions) of any State." Investments banks, payday lenders, and other established financial firms have been fighting the bill hard. But once the bill gets to a certain point, the agenda moves from "kill it!" to "at least make it worse for our competitors." Perhaps the banking industry's lobbyists have been talking with Nabisco. No one wants to compete with the Girl Scouts. Far better to get those knee-socked sharks out of the game.
Katherine Mangu-Ward is a senior editor at Reason magazine. This column first appeared at Reason.com.