SEC, DOL approach fiduciary standard from different angles

It’s a marathon, not a sprint.

While occasionally it has seemed that the Securities and Exchange Commission (SEC) and the Department of Labor (DOL) have been racing to draft fiduciary rules, the pace is more turtle than rabbit. Here’s an overview of where things stand now regarding developments in the universal fiduciary standard situation.

On March 1, roughly three years after the Dodd-Frank Act authorized (but did not require) the SEC to impose a fiduciary standard on broker-dealers, the SEC issued a sweeping, long-anticipated (and long-winded) request to the financial services industry and the public for comment and data. The agency asked for their help in determining changes to standards of conduct that apply to certain types of financial advisors.

The SEC is currently in the midst of the 120-day process of collecting responses, which ends on July 5. SEC Chairwoman Mary Jo White has said no decision will be made to move forward with the SEC’s rulemaking until the agency reviews the comments and data, which will likely take months.

Meanwhile, the DOL is working on a revised proposal to amend the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA), which would establish new rules for the sale of investment products to beneficiaries of company-sponsored retirement plans and IRAs.

There is great concern the DOL’s re-proposed rule could eliminate the ability to have a commission-based model for ERISA accounts and create substantial operational challenges for brokers who may have to operate under conflicting rules from two different agencies (DOL and SEC) for one client. A DOL rule could contradict provisions of Dodd-Frank specifying that receipt of commissions and sales of proprietary products are not intrinsically fiduciary violations. The DOL’s revised proposal was rumored to be unveiled in July, but it’s now unlikely to be made public until this fall at the earliest.

Then, in mid-May, Congress released a discussion draft of a bill that would require the SEC and DOL to collaborate on their fiduciary rules. It would amend Section 913 of the Dodd-Frank Act by:

• Mandating that the SEC coordinate with other federal agencies before issuing any broker-dealer fiduciary rule;
• Requiring the SEC, before issuing any rule, to find that the new rule will remedy investor confusion; and
• Requiring the SEC, before issuing any final rule, to find that the status quo demonstrates economic harm to investors and that the new rule will remedy this economic harm.

SEC Chair White told the House Financial Services Capital Markets Subcommittee, which released the discussion draft, that while the SEC and DOL staffs have been in frequent contact regarding their fiduciary rules, she stressed the two are different agencies that will ultimately make their own independent decisions.

Meanwhile, industry organizations including the National Association of Insurance and Financial Advisors (NAIFA) and the Association for Advanced Life Underwriting (AALU) are busy crafting their comments in response to the SEC’s request for comment release, which came in the form of a 72-page document with a variety of assumptions.

In the release’s introduction, the SEC states that it intends to use the comments and data it receives to inform its consideration of alternative standards of conduct for broker-dealers and investment advisors when providing personalized investment advice about securities to retail customers. It also will use this information to inform its consideration of potential harmonization of certain other aspects of the regulation of broker-dealers and investment advisors.

The release background states that the identification of particular assumptions does not suggest the SEC’s policy view or the ultimate direction of any proposed action by the SEC. It invites comment based on other assumptions chosen by commenters, as well as comparisons between analyses made under assumptions chosen by commenters and analyses made under those assumptions chosen by the SEC.

The Institute for the Fiduciary Standard, a nonprofit think tank whose single purpose is to promote the vital importance of the fiduciary standard in investment and financial advice, is worried the SEC’s request for input suggests it will adopt rules that will “water down” the broad fiduciary standard applicable to investment advisors under the Investment Advisers Act of 1940, under which RIAs currently function.

The Institute for a Fiduciary Standard, in an April 16 condensed version of its white paper about the March 1 SEC release, said if the explicit assumptions in the release were adopted in rulemaking on a uniform fiduciary standard, fiduciary duties would be sharply restricted, effectively removed when brokers and advisors render investment advice. “The era of FINO — Fiduciary In Name Only — would have arrived,” the Institute’s release stated. “Individually, each of these assumptions — restricting the broad concept of advice implicit in the Advisers Act, permitting the waiver of fiduciary duties, framing disclosure as the optimum measure of loyalty, and omitting the strongest disclosure requirement (of informed consent) — could materially undermine the stringency of a uniform fiduciary standard as compared to the Advisers Act fiduciary standard.”

NAIFA preparing comments

Gary Sanders, NAIFA vice president of securities and state government relations, told Life Insurance Selling in mid-May that NAIFA has not yet submitted its comments to the SEC. “The SEC request is very detailed, has many parts and asks a number of very specific questions about registered reps, registered investment advisors and their clients,” he said. “NAIFA wants to be as responsive to the SEC as possible, and is drawing on member surveys, published studies and other resources to answer the questions as thoroughly as we are able.”

NAIFA commissioned LIMRA to survey its members and consumers in 2010 on a variety of topics in connection with this issue, and a key finding from that survey indicated that if a universal fiduciary standard of care was imposed on investment advisors and broker-dealers in connection with their providing retail investment advice, there was a risk that mid-market investors could lose access to needed products and services.

“The survey found that consumers with household incomes in that middle-market range represented a core client base of NAIFA members,” Sanders said. “Our comments will address those concerns and focus on the value that registered representatives of broker-dealers provide to retail customers, and emphasize that any SEC fiduciary rule should not do anything to reduce services or increase costs for this group of people who have a crucial need for investment products and advice.”

After the SEC sorts through all the comments and data, Sanders said it will likely take some time for the agency to produce a meaningful cost-benefit analysis of the potential impact of a possible standard of care rule. After that process is completed, if the SEC decides to move forward with the development of a rule, the next step could be for the commission to release for comment the actual language of a proposed standard of care rule, which will then require a certain time period to allow for the public to submit comments on the proposed rule.