Bates Research  |  06-07-17

SEC Initiates New Review of Investor Protections As DOL Fiduciary Rule Goes Into Effect


In one of his first official acts as SEC Chair, Jay Clayton served notice that the SEC will assert itself in the long-standing debate on the duties owed by investment advisors and broker-dealers. In a public statement issued only a few days before the implementation of parts of the Department of Labor (“DOL”) Fiduciary Duty Rule, Mr. Clayton staked out the SEC’s claim to broad jurisdiction over the issue. Mr. Clayton argued that the DOL Rule [*] may have “significant effects on retail investors and entities regulated by the SEC,” and “may have broader effects on our capital markets.” As a consequence, he said, “many of these matters fall within the SEC's mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.”

“Once More Unto The Breach…”

Mr. Clayton announced that the SEC will undertake an ambitious and broad new assessment of the current regulatory framework, including a review of the “state of the market for retail investment advice and market trends.” Such an updated assessment, he argued, is necessitated by the significant developments that have occurred since “the RAND study of investor perspectives was commissioned in 2006, the Dodd-Frank Act Section 913 staff study conducted in 2010-2011, and, most recently, a solicitation of data and other information in 2013.”

As a result, Mr. Clayton opened up for comment a wide range of open-ended questions that might help the Commission “evaluate a range of possible regulatory actions.” A few of the many subjects up for refreshed consideration include: revisiting standards of conduct toward retail investors, potential conflicts of interest, the impact of new technologies, trends in compensation (fee-based advice versus commission-based brokerage), regulatory and jurisdictional harmonization, appropriate disclosure requirements, available remedies, costs, A webform and e-mail box have been set up for members of the public to provide their input, though the comment period currently has no deadline. Mr. Clayton stated that he looks forward to “robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

The initial response to the initiative has some academics pointing out that SEC commissioners have long been too divided to reach consensus on “the extent of the SEC’s fiduciary regulation on advisers and broker-dealers”. Since 2010, the SEC has had the authority under the Dodd-Frank Act to develop its own standards, but it has not done so. Other commenters argue that this time it will be different, in part, because of the political urgency of the DOL implementation deadlines.

Clayton vs. Acosta?

Mr. Clayton acknowledged Labor Secretary Alexander Acosta’s recent statement that there was no legal justification for delaying the Fiduciary Rule implementation date of June 9th. He also recognized Mr. Acosta’s stated intention to conduct additional review. Mr. Acosta reiterated that need recently. Speaking at a hearing before a House Subcommittee, he suggested that a new DOL review was necessary because “concerns” that surfaced “the first time around” were “unfortunately not heard. And that’s what happens.” He stated further that he needs “data in order to decide how to proceed.”

Mr. Clayton noted Secretary Acosta’s stated interest in a collaboration between the DOL and SEC so that the agencies could “engage constructively as we each pursue our ongoing analyses of the standards of conduct applicable to investment advisers and broker-dealers when they provide investment advice to retail investors.” It is clear, however, that Mr. Clayton is taking ownership of the issue, communicating - somewhat diplomatically - that he welcomes Labor’s “invitation to engage constructively as the Commission moves forward with its examination of the standards of conduct applicable to investment advisers and broker-dealers, and related matters.” Both Mr. Clayton and Mr. Acosta are publicly committed to carrying out the intentions of President Trump as expressed in his February 3, 2017 Presidential Memorandum on Fiduciary Duty Rule. (See here for prior Bates’ coverage.)

What Matters Now?

Inter-agency jockeying over future regulation of investment advisors and broker dealers does not affect the preparations that firms need to make right now in order to comply with the impending effective provisions of the DOL Rule. This week, for example, FINRA amended its reporting requirements adding a new Rule 4530 Problem Code and new fields to its Filing Application Form in order to facilitate compliance with the DOL Rule. (See generally, FAQs on DOL Rule 4530 Compliance).

There is little doubt that the SEC initiative to again seek public comment on investment advice standards will break along familiar lines of industry and political advocacy. In the meantime, compliance professionals will be required to keep track of the regulatory requirements that exist, as well as the ones that are yet to come. Bates Group will continue to follow all developments.

[*] For more background and history on the Department of Labor’s Fiduciary Rule, please see our coverage here.


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