SEC to consider imposing a fiduciary standard on brokers

June 2017

Securities and Exchange Commission (SEC) Chairman Jay Clayton announced Thursday that the SEC will solicit input on the standards of conduct for investment advisers and broker-dealers.

Clayton’s announcement that the SEC will again seek input on whether to impose a fiduciary standard on broker-dealers seems related to the Trump administration’s efforts to deal with the Department of Labor (DOL) fiduciary rule. DOL Secretary Alexander Acosta announced two weeks ago that the new DOL fiduciary rule and impartial conduct standards would become applicable June 9. In his op-ed announcing the decision, Acosta explicitly invited the SEC to work with the DOL as it works to revise the fiduciary rule: “[T]he SEC has critical expertise in this area. I hope in this administration the SEC will be a full participant.” Clayton noted in his announcement that he “welcome[s] the Department of Labor's invitation to engage constructively” as the commission analyzes a fiduciary rule.

Noting that the SEC had reviewed the issue in 2006, from 2010-11, and again in 2013, Clayton said that developments in the marketplace since 2013, including “financial innovations, changes to investment adviser and broker-dealer business models, and regulatory developments — including the issuance and pending applicability of the Department of Labor's Fiduciary Rule” necessitate the updated analysis. 

What feedback is the SEC seeking?

In addition to seeking general comments on what the appropriate advice standard is, the SEC announcement poses a series of specific questions, including, among other topics:

  • whether investor confusion remains about the types of professionals providing advice,
  • whether conflicts of interest have been appropriately addressed,
  • how the DOL fiduciary rule has affected the marketplace,
  • who should be considered a retail investor, and
  • how “investment advice” should be defined.

The SEC request for information confirmed what had seemed increasingly likely. The first hint that the SEC might be preparing to consider a fiduciary rule came when Commissioner Michael Piwowar, then the SEC’s acting chairman, said that the SEC should “reassert its role” in setting advice standards. This statement toward the end of April was notably absent from remarks he made in early March at the Investment Adviser Association compliance conference. There, he blasted the DOL rule but seemed skeptical about the SEC promulgating a fiduciary rule: “It is a really, really, really hard issue to deal with.”

Piwowar went on to talk about trying to mitigate investor confusion about the different advice standards applicable to brokers and to investment advisers. Notably, this issue is the first of the 17 bullet points of questions posed by the SEC.

What’s next?

So now both the DOL and the SEC will solicit additional information about what the marketplace looks like, what the appropriate advice standard is, and how to make that standard work for investors and advisors. How or where that process ends remains unclear, particularly given that the DOL’s rule will already be partially applicable and that the DOL and SEC have very different regulatory schemes.

The SEC announcement also likely increases the chances that the DOL seeks additional delays of the Jan. 1 applicability date for the rest of the fiduciary rule exemptions. In the meantime, the fiduciary rule (i.e. the new fiduciary definition) will apply as of June 9 and the Best Interest Contract Exemption and Principal Transactions Exemption will be available as of June 9. Those exemptions will only require fiduciaries to adhere to the impartial conduct standards: (1) providing advice in retirement investors’ best interest; (2) charging no more than reasonable compensation; and (3) avoiding misleading statements.

If you have questions about the changes or how best to comply, please contact the attorneys in Greensfelder’s Securities & Financial Services group.

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