SEC Fiduciary Rule Expected April 2017

Guest Post by Expert Geoff Winkler

The Securities and Exchange Commission (“SEC”) plans to issue its long-anticipated fiduciary rule by April 2017, according to a proposed rule posted on the Office of Management and Budget website on May 18th of this year. The proposed rule, known as the Personalized Investment Advice Standard of Conduct (3235-AL27), would create “…a uniform standard of conduct for broker-dealers and investment advisors…” that provide investment advice to clients based on the authority established under Section 913 of the Dodd-Frank Act of 2010 (“Dodd-Frank Act”). 

However, the same section of the Dodd-Frank Act that creates authority for these protections might also serve as a limitation of those same protections. Under the Act, the SEC must “…develop a standard for broker-dealers no less stringent than the existing standard for investment advisers [Investment Advisers Act of 1940], while accommodating sales-based compensation and the sale of proprietary products or limited product lines.” 

This, according to SEC Investor Advocate Rick Fleming in his 2016 Investor Advocate Report to Congress, makes implementation of the SEC fiduciary rule “especially challenging” given what appear to be “contradictory mandates” under Section 913. In acknowledging these contradictions, Fleming believes that “an ill-advised SEC rule could be worse than no rule at all” given that it “could dilute the existing standards for investment advisors” and could “create even worse confusion” by telling investors they have the protection of a fiduciary duty, that “is, in fact, less stringent than the traditional duty that applies in other relationships of trust.”    

This, of course, comes on the heels of the Department of Labor’s own fiduciary rule. We have previously discussed the DOL’s fiduciary rule and its impact on the financial industry. During the drafting phase of DOL’s fiduciary rule, the SEC offered advice about the proposed rule. However, Senate Homeland Security and Governmental Affairs Chairman Ron Johnson stated, in his February 24th report, that the DOL “disregarded concerns and recommendations from career, nonpartisan professional staff” at the SEC. Senator Johnson says that the SEC identified at least 26 items of concern that the DOL declined to fully resolve, leading a senior SEC official to state:

“We continue to believe that commentators are likely to raise concerns that the proposal may result in reduced pricing options, rising costs and limited access to retirement advice, particularly for retail investors. Commentators also may express concerns that broker-dealers, as a practical matter, may be unlikely to use the exemptions provided and may stop providing services because of the number of conditions imposed, likely compliance costs, and lack of clarity around several provisions.”

This discord has left many, including SEC Chairwoman Mary Jo White, to suggest in her March 22nd House Appropriations hearing testimony, that the DOL and proposed SEC fiduciary rules may not be consistent with each other. Chairwoman White said that the SEC was working to make sure the two rules were consistent, but “they don’t always land identically.”

The SEC fiduciary rule is still a long way from becoming law, as Chairwoman White will need at least two additional members of the Commission to support the rule. That task is especially difficult given that two of those four seats are currently vacant as the SEC awaits Senate confirmation of the two Obama administration appointees. After a more than a six-month delay, both confirmations were approved by the Senate Banking Committee and are currently awaiting a full vote of the Senate. In addition, the upcoming presidential election may likely trigger a change in leadership at the SEC, further delaying the release of an SEC rule.

We will continue to keep you updated on important developments related to the DOL and proposed SEC fiduciary rules. Should you need any assistance in understanding any aspects of the new rule, we encourage you to contact Alex Russell, our Fiduciary Rule point person, at (503) 670-7772 or arussell@batesgroup.com.