On June 1, 2017, newly appointed U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton announced the Commission would begin an “updated assessment of the current regulatory framework and current state of the market for retail investment advice,” to determine whether the SEC should impose a “fiduciary duty” -- most commonly characterized as a duty always to act in a customer’s “best interests” -- on stockbrokers who provide personalized investment advice to their retail customers. The direct impetus for Chairman Clayton’s announcement is the controversial “Fiduciary Rule” adopted by the U.S. Department of Labor (the “DOL Rule”) by which securities broker-dealers who deal with ERISA-covered retirement plans and participants, IRA investors, or who provide related retirement planning advice, were made subject to the standard of conduct imposed by ERISA on “investment advice fiduciaries.” Parts of the DOL Rule are effective on June 9, 2017 (with the remainder transitioning to full effectiveness on January 1, 2018), and broker-dealer compliance efforts are now underway.
Adoption of the DOL Rule eclipsed previous initiatives by the SEC, including a study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act that in 2013 led to a recommendation that formal SEC rulemaking on a broker-dealer fiduciary duty be undertaken. Thereafter, however, the process languished, with no actual rule proposal. The DOL Rule proposal and adoption eventually took center stage, and renewed a bone of contention that it intrudes upon the broker-dealer regulatory structure that is the province of the SEC. With the DOL Rule now in effect, in his June 1, 2017 statement, SEC Chairman Clayton observed that the DOL Rule “may have significant effects on retail investors and entities regulated by the SEC,” and that it may “also have broader effects on our capital markets.” Many of these matters, he said, “fall within the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.” His statement suggests an aggressive approach by the SEC in its resuscitated fiduciary rule initiative to challenge the scope and impact of the DOL Rule. Meanwhile the existing standard of conduct for broker-dealers in their retail customer relationships based on “suitability” of advice and recommendations remains in place.
The future of the DOL Rule is in any event uncertain. Most recently, Secretary of Labor Alexander Acosta offered that concerns about the DOL Rule were not heard during the original rulemaking process, and he announced that the DOL will seek further input from the public on how to revise the entire rule. He expressed hope that the SEC would be a participant in that process, to which SEC Chairman Clayton has now responded with a call for “clarity and consistency,” and coordination between the two regulatory bodies. It is unclear how the now extant multiple standards of conduct will be taken into account in the SEC assessment of its own future rulemaking. One thing is certain: The regulatory perspective of the SEC versus the ERISA-based fiduciary perspective of the DOL are fundamentally different. The DOL “fiduciary” rule expands the definition of a fiduciary for purposes of ERISA to include broker-dealers who provide investment advice to IRA owners and ERISA retirement plans for fees.
As fiduciaries, broker-dealers must adhere to a best interest standard that goes further than what the SEC would likely adopt under a unified “best interests” broker-dealer and investment adviser standard of conduct. The DOL Rule, for example, treats broker-dealer transaction-based compensation, such as commissions or revenue sharing, as a prohibited transaction under ERISA. Accordingly, broker-dealers who intend to receive transaction-based compensation must satisfy the requirements of a formal exemption regulated by the DOL, which includes providing IRA customers a contractual right of action to hold their broker-dealer advisors to a fiduciary standard of conduct. The DOL Rule is considerably more complex in regard to other restrictions and disclosure requirements that fall outside any straightforward unification of broker-dealer and investment adviser standards of conduct under the federal securities laws.
To facilitate the SEC evaluation of potential future actions on a broker-dealer standard of conduct, Chairman Clayton has called for public comments on numerous broadly stated multipart questions and subject areas. Chairman Clayton has, with his own comments and the substantial requests for public comments, opened the door to full consideration of a broker-dealer standard of conduct, including alternatives such as an entirely different disclosure-based approach to address fiduciary-related concerns arising out of the broker-customer relationship. Whatever future action may be taken, however, will first be shaped by whether, or to what extent, the DOL Rule shall stand as establishing a separate standard of conduct, or whether it gives way to a unified SEC imposed broker-dealer standard of care in all settings.
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Amy M. Oldiges