In all likelihood, we won’t see even a notice of proposed rulemaking on “Personalized Investment Advice Standard of Conduct” from the Securities and Exchange Commission until October. That timeline for meeting a requirement of the Dodd-Frank Act comes from the Commission’s recent update to the White House’s Office of Management and Budget.

The Department of Labor, however, crafting a similar rule, is already acting on it, looking to get it on the books before President Obama leaves office [its final rule is currently undergoing a last-step review by the Office of Management and Budget]. That effort has put the investment world on high alert.

In recent remarks, SEC Commissioner Mary Jo White has said her staff is “flat-out” working on its rule proposal, but won’t rush it for fear of unintended complexities and consequences. In broad strokes, that rule seems fairly straightforward. It would limit all broker-dealers and advisers to only provide financial advice that is in the best interests of their clients.

Complicating maters is that the Labor Department’s proposal is due any day. As detailed in thousands of comment letters, as well as a concerted lobbying effort, a lack of coordination and symmetry throughout the process could lead to industry-changing consequences.

“A significant source of concern among financial institutions involved with retirement plans and IRAs are multiple problems because of either repetitiveness or inconsistencies in regimes,” says Steven Rabitz, a partner with law firm Stroock & Stroock & Lavan whose practice concentrates on matters of fiduciary responsibility. “There are members of Congress who have gone on record saying that the Labor Department might need to wait for the SEC to come out with its fiduciary standard.” In fact, as many have pointed out, the Dodd-Frank Act envisioned that the SEC would be the agency at the center of the process, with the Labor Department building upon, and conforming to, its rulemaking.

Despite claims to the contrary, coordination between the two agencies is questionable. Former SEC Commissioner Dan Gallagher bluntly addressed that matter in a speech last February.

“Despite public reports of close coordination between the DoL and SEC staff, I believe this coordination has been nothing more than a ‘check the box’ exercise designed to legitimize the runaway train that is their fiduciary rulemaking.”
Daniel Gallagher, Commissioner, SEC

“Despite all the work the SEC staff has undertaken on the subject, not to mention the Commission's decades of history in regulating broker-dealers and investment advisers and overseeing their disclosures relating to conflicts of interest, [the] DoL has not formally engaged the Commissioners, at least not this Commissioner, on its fiduciary rulemaking process and the impact it may have on investors,” Gallagher said. “Despite public reports of close coordination between the DoL and SEC staff, I believe this coordination has been nothing more than a ‘check the box’ exercise designed to legitimize the runaway train that is their fiduciary rulemaking.”

“Obviously, it would be a great thing for regulators to coordinate and not have any inconsistencies or additional rules that complicate and impose costs that ultimately get passed along to the end users,” Rabitz says. “You are talking about reengineering the entire regulatory framework.”

Improperly drafted, the rules could mean that “if people sneeze next to a plan or an IRA they are all of a sudden a fiduciary.” Nearly any conversation with a client, or potential client, could earn the distinction of being investment advice.

“Who could disagree with requiring people to act in the best interest of your client? I don’t think that there is that much of an objection for holding people to a standard where they act in a client’s best interest … But the bottom line is that once you become a fiduciary, you can’t do anything in the world with those assets you are dealing with to earn a fee or get paid, even if you think it is the best thing in the world for the plan,” Rabitz says. Marketing and advertising will need to be radically reconsidered in the potential landscape, as is even the most mundane discussions that might be considered to be “advice.”

“Larger firms are serious about leaving certain businesses,” he warns.

The rulemaking process is shaping up to be “a complete disaster for the market,” says Erin Sweeney, counsel at law firm Miller & Chevalier and a former DoL attorney. The fast approaching end of the Obama Administration has meant a “take-no-prisoners and get-it-done process.”


The following is an excerpt from a July 2015 comment letter, authored by former SEC Commissioner Daniel Gallagher, regarding the Department of Labor’s pending rulemaking on fiduciary duty.
It is clear to me that the DOL rulemaking is a fait accompli and that the comment process is merely perfunctory, yet I feel compelled to weigh in on the Fiduciary Proposal because I am convinced that the rule, when finalized, will harm investors and the U.S. capital markets. The proposal is grounded in the misguided notion that charging fees based on the amount of assets under management is superior in every respect and for every investor to charging commission-based fees.
It brazenly dismisses both suitability as a proper standard of care for brokers and the FINRA arbitration system as a mechanism to resolve disputes between financial professionals and their clients- good for plaintiffs' lawyers, bad for investors.
Broker-dealers utilizing a commission-based fee structure will find it difficult, if not impossible, to navigate the labyrinth of prohibitions and exemptions contemplated by the proposal, and many will make the unfortunate- yet entirely rational- choice to stop servicing certain retirement accounts. High net worth broker-dealer clients will be moved into fee-based advisory accounts and will pay a premium to the existing commission structure. Less well-heeled customers will be "fired" by their brokers or jettisoned to robo-advisers.
Source: SEC Commissioner Daniel Gallagher

“Right now, they are going to put this into play in eight months, and everyone in the industry is saying they can’t do it,” she says of that rule proposal. “In just eight months, we can’t evaluate what these changes are or implement them. The risk of not being in compliance is just too great for those to want to provide services to this market. They have really run roughshod over this and just pushed it through. It is going to subject the market to two different standards. What’s going to happen to the market when there is a series of conflicting regulations?”

Sweeney calls the effort “a watershed regulation that changes the fundamental basis of how retirement plan services are offered.”

The question, of course, is how firms should respond to rules that now seem inevitable. The Labor Department, Sweeney says, suggests that they start shaping compliance efforts now. “I don’t know how that is possible,” she counters. “I have told my clients that it would be irresponsible to try to set your systems in place until we have any idea what the Labor Department is going to come out with.”

A likely rulemaking change is that firms need to have a written contract prior to making a recommendation. “What do you do about advertising and marketing? How could you ever get a written contract for that? What about requests for proposals? What if you make a cold call to prospects, which is the way this industry works? Do you need to get a written contract and how is that workable?” Sweeney asks. Another issue: how to deal with account openings that are done completely online.

Also alarming is the Labor Department's suggestions of “retroactivity.” Chat with an acquaintance at a dinner party and, should they later become a client, you will discover that you were a fiduciary the whole time.

“I can’t imagine how you would advise putting any systems in place when we have no idea what the Labor Department is going to make this look like,” Sweeney says. “My advice to clients is to sit back and realize you are going to have a sprint ahead of you. As soon as that new rule comes out, we are going to have to do the best we can and the Labor Department is not a fan of good faith compliance.”