SEC Seen on Verge of Proposing a Fiduciary Rule
(Corrects fifth paragraph to indicate that nominations of two SEC commissioners have been approved by the Senate.)
The Securities and Exchange Commission will likely issue a proposal in the next few months aimed at requiring brokers to apply a customer best-interest “fiduciary” standard to all brokerage accounts, according to regulators and consumer advocates.
The timing indicates the importance that SEC Chairman Jay Clayton puts on addressing discrepancies that have arisen between regulation of individual retirement accounts and standard brokerage accounts since the Department of Labor’s fiduciary rule affecting IRAs took partial effect last summer.
Brokers and firms offering non-retirement accounts abide by a less-rigorous suitability standard that permits them to recommend products that may pay them more than competing ones, as long as the investments meet customers’ risk and investment-goal requirements.
A spokeswoman at the SEC declined to comment on the progress or timing of a fiduciary rule proposal.
The SEC is likely to move shortly after Hester Peirce and Robert Jackson are sworn in as commissioners, said Joseph Borg, director of the Alabama Securities Commission and president of the North American Securities Administrators Association. The nominations have already been approved by the Senate.
Clayton’s accelerated approach, however, which was reported on Wednesday by The Wall Street Journal and attributed to people familiar with the SEC’s plans, has raised hopes among industry executives concerned about confusion over the two standards.
“There is only a short window of opportunity for the SEC to act on this critical issue and to resolve the market dynamics already adversely affecting retail investors,” David Kowach, head of Wells Fargo & Co.’s retail brokerage businesses wrote in a September comment letter. “Unless there is swift action by the Commission, the DOL will have effectively assumed the SEC’s role as the primary regulator for oversight of personalized investment advice for retirement accounts.”
Merrill Lynch and some other firms last year began eliminating customers’ ability to own retirement brokerage accounts subject to the suitability standard.
Knut Rostad, co-founder of the Institute for the Fiduciary Standard, said he is concerned that the SEC will propose a lighter version of the DOL rule that will be based on a “commercial” best-interest legal definition and that centers on disclosure of conflicts of interest.
“There’s mountains of evidence, and credible research, to conclude that disclosure doesn’t work,” Rostad said.
Other proponents of a strong fiduciary rule are more optimistic.
“I have had conversations with Chairman Clayton in which he seems to recognize that disclosure is not adequate to deal with all conflicts of interest,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “We won’t know until we see a concrete proposal how far they’re willing to go.”
Whatever the SEC proposes is likely to end up in court. A fiduciary rule that pleases consumer groups will draw a lawsuit from the industry, while a disclosure-based regime will provoke litigation from her constituencies, Roper told the “Journal.”
The Department of Labor has delayed full implementation of the fiduciary rule until July 2019, and is reassessing enforcement provisions that would allow investors to bring class-action lawsuits alleging fiduciary violations.
Some fiduciary rule proponents expect the DOL to dilute or eliminate a key enforcement mechanism that would permit investors to bring class-action lawsuits for alleged fiduciary standard infractions, a provision strongly opposed by the securities industry.
Most firms’ account-opening documents restrict customers to bringing complaints in arbitration forums rather than in courts.
Borg said that even if the right to bring lawsuits is eliminated, investors retain options to pursue bad actors. “States give a private right of action, even under the suitability standard,” he said.
The SEC’s fiduciary rule proposal may ban brokerage firms from allowing their salespeople to call themselves financial advisers unless they accept a customer-first fiduciary obligation, according to the “Journal.”
“The concept behind that is sound,” Roper said. “Clearly part of the reason why investors can’t tell brokers from advisors is that they use all of the same titles.”