Court ruling unlikely to derail SEC fiduciary rule
March 16, 2018 by Kenneth Corbin
WASHINGTON — A federal appeals court may have stuck down the Department of Labor’s fiduciary rule, but that isn’t likely to hinder efforts at the SEC to craft its own higher standard of client care.
“Even if the DoL rule goes away altogether, they still need to worry about states stepping [forward] with their own fiduciary duty rule for broker-dealers, so my guess, if I had to guess now, is that the SEC is going to go forward,” said Karen Barr, CEO of the Investment Adviser Association, who spoke at the group’s annual compliance conference.
The SEC has been authorized to craft a fiduciary rule since the Dodd-Frank Act passed in 2010. But the agency has failed to do so in recent years. SEC Chairman Jay Clayton, appointed by President Trump, has said he’s making the rule a priority. Meanwhile, several states such as Nevada have moved to create their own fiduciary rules.
Earlier this month, a coalition of 11 state treasurers called on the SEC to enact a uniform fiduciary standard for advisors serving retail clients that would be at least as strong as the Labor Department rule. Some states have been pursuing their own fiduciary rules, creating the prospect of an increasingly fragmented regulatory environment.
A spokeswoman for the SEC declined to comment for this report.
SEC commissioners from both parties, as well as the chairman, have spoken about the importance of harmonizing the regulatory landscape in which financial professionals provide similar advice and services but are held to different standards of conduct.
“The whole reason the SEC is trying to address this issue is the confusion that investors have,” said Rick Fleming, the SEC’s investor advocate.
The contours of the SEC’s anticipated fiduciary framework have come into focus as the commission gets closer to finalizing and publishing its proposal.
Barr outlined a likely three-part structure to the proposal that would include a new rule for brokers to act in the best interest of their clients, a new disclosure document for both brokers and advisors, and some guidance on what obligations advisors have under the fiduciary responsibilities that come from the 1940 Investment Advisers Act.
She also noted that there is some indication from the commission that it is considering including language that would address the issue of titles and how financial professionals represent themselves. Some groups have called for the SEC to clarify what types of financial pros can use the term “advisor,” and Clayton has indicated that the commission is examining the issue of titles.
But the framework that was starting to take shape could now change considerably in light of the appeals court’s ruling, according to Neil Simon, IAA’s vice president for government relations. That likely revision could alter the policy provisions of the proposal, or its legal underpinning, given the court’s finding that the Labor Department exceeded its statutory authority.
“Although I suspect that there is still a lot of momentum and that the SEC will move forward, I have to believe this is going to give them pause and they are going to have to reconsider the authority upon which they are basing what appears to be the proposal,” Simon said.
All indications from the SEC suggest that it won’t move to dramatically upend the brokerage business model, according to Brendan McGarry, an attorney specializing in broker and advisor issues with the law firm Kaufman Dolowich & Voluck.
“Based on all of the comments to date by the SEC, its anticipated fiduciary standard will likely try to fit within the current regulatory construct,” McGarry writes in an email. “That is, the SEC appears to be trying to allow for current business models of both fee-based accounts and commission-based accounts, without pre-determining one is better than the other.”
Fleming shares the view that the SEC is likely to move ahead with a standard of conduct rule for brokers and advisors, irrespective of the DoL’s legal setback. However, he worries that the focus on a so-called best interest standard could overtake the more rigorous fiduciary responsibilities that put more of an emphasis on mitigating conflicts rather than simply disclosing them.
“I think people sort of recognize the difficulty of having a true fiduciary duty on the brokerage business which is a commission-based model and has sort of inherent conflicts in it,” he said. “If you’re going to impose what you’re calling a best interest standard on the broker-dealer side, it needs to actually make a difference. It shouldn’t just be suitability with a different name.”
“So I ask the question, basically: What would a broker be prohibited from doing under a best interest standard that they’re now allowed to do under a suitability standard?” Fleming said. “And if there’s no daylight between the two, at the end of this rulemaking, then what was the point?”
