Among the many criticisms of the Department of Labor’s “fiduciary rule,” is that the Dodd-Frank Act, and many of those covered by the rule, anticipated that it would be the domain of the Securities and Exchange Commission.

The agency, many still argue, is better suited for the task and saw its regulatory oversight usurped by the Obama Administration and its Labor Department. Now, the first time, the SEC has announced it is entering the fray and Commissioner Jay Clayton has launched a new public comment process.

In April 2016, the Labor Department finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. It provides exemptions that, if applied for and granted, would allow these advisers to maintain fee-based arrangements. In general, fiduciaries are prohibited from receiving commissions, which are considered to present a conflict of interest. The new rule, however, creates a Best Interest Contract Exemption for fixed index annuities and variable annuities. It allows fiduciaries to receive commissions only if they adhere to certain conditions, including signing a written contract with the consumer that contains enumerated provisions intended to protect their interests.

In February, President Donald J. Trump ordered the Labor Department to review the rule and prepare an updated economic and legal analysis. If it concludes that the rule is “inconsistent” with Administration priorities, it was instructed to rescind or revise the rule as appropriate. 

Recently, noting legal obligations of the Administrative Procedure Act, and its requirements for notice and seek public comment, Labor Secretary Alexander Acosta announced that an initial batch of compliance obligations would begin on June 9, even though he—and the administration—still hoped to substantially revise the rule at some point. Acosta also stated his desire that the Labor Department and SEC the Securities and Exchange Commission “engage constructively” on standards of conduct applicable to investment advisers and broker-dealers when they provide investment advice to retail investors.

“The Department of Labor's Fiduciary Rule may have significant effects on retail investors and entities regulated by the SEC,” Clayton wrote, in a statement released on June 1.  “It also may have broader effects on our capital markets.  Many of these matters fall within the SEC's mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.”

Clayton welcomed the “invitation to engage constructively.”

The SEC, he said, has reviewed the issue many years, including a study of investor perspectives commissioned in 2006, a study mandated by the Dodd-Frank Act, and a solicitation of data and other information in 2013.

“These efforts illustrate the complexity of the issues as well as the fast-changing nature of our markets, including the evolving manner in which investment advice is delivered,” Clayton said. “The range of potential actions previously suggested to the Commission is also broad, from maintaining the existing regulatory structure, to requiring enhanced disclosures intended to mitigate reported investor confusion, to the development of a best interests standard of conduct for broker-dealers.”

Another past consideration: pursuing a single standard of conduct combined with a harmonization of other rules and regulations applicable to both investment advisers and broker-dealers when they provide advice to retail investors.”

“I believe an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends is important to the SEC's ability to evaluate the range of potential regulatory actions,” Clayton added, announcing that the SEC has begun a public comment process on the fiduciary rule, “in advance of any future Commission action.”

Among the many questions commenters are asked to weigh in on:

Retail investors have expressed confusion about the type of professional or firm that is providing them with investment advice, and the standards of conduct applicable to different types of relationships. To what extent has this reported confusion been addressed? 

If meaningful confusion remains, is the confusion harming retail investors or resulting in other costs?  If so, what steps should be taken to address this situation? 

What disclosures, advertising, or other information do investment advisers and broker-dealers provide to retail investors currently, and how do those contribute to or mitigate any investor confusion? 

Are there specific disclosure requirements or other steps the Commission should consider to address any confusion regarding applicable standards?

Have potential conflicts of interest related to the provision of investment advice to retail investors in various circumstances been appropriately identified and, if so, have they been appropriately addressed? 

Are there particular areas where conflicts are more prevalent or have greater potential for harm? 

To what extent are retail investors being, or expected to be, harmed by these conflicts currently and in the future?

Would broker-dealers or investment advisers be expected to withdraw from or limit their offerings or services in certain markets or products?

Market developments and advances in technology continue to transform the ways in which retail investors obtain advice (e.g., robo-advisers, fintech). How do retail investors perceive the duties that apply when investment advice is provided in new ways, or by new market entrants? Is this perception out of step with the actual obligations of these entities and, if so, in what ways? 

How should market developments and advances in technology affect the Commission's consideration of potential future actions? What steps should the Commission take, if any, to address potential confusion or lack of information in these emerging areas?

Is there a trend in the provision of retail investment advice toward a fee-based advisory model and away from a commission-based brokerage model? To what extent has any observed trend been driven by retail investor demand, dependability of fee-based income streams, regulations, or other factors?

How has any observed trend impacted the availability, quality, or cost of investment advice, as well as the availability, quality, or cost of other investment products and services, for retail investors? Does any such trend raise new risks for retail investors?  If so, how should these risks affect the Commission's consideration of potential future action?

Although the applicability date of the Department of Labor's Fiduciary Rule has not yet passed, efforts to comply with the rule are reportedly underway.  What has been the experience of retail investors and market participants thus far in connection with the implementation of the rule? How should these experiences inform the Commission's analysis?

Are there particular segments of the market (e.g., smaller and regional broker-dealers and investment advisers, or smaller investor accounts) to which the Commission should pay particular attention in considering potential future actions?

If the Commission were to proceed with a disclosure-based approach to potential regulatory action, what should that be? 

If the Commission were to proceed with a standards-of-conduct-based approach to potential regulatory action, what should that be? Should the standards for investment advisers and broker-dealers be the same or different? 

How would any such suggested approach (disclosure, conduct standards, etc.) be implemented? Specifically, what initial steps would need to be taken to conform to the new rules, and what ongoing processes would need to be put into place to promote compliance and oversight? 

Would the Commission need to provide additional regulatory guidance or rules? 

If the Commission were to impose new requirements, should private remedies be available for violations of any new requirements?  If so, in what venue or venues should such claims be brought?

Should the Commission establish uniform rules, or should parties determine available remedies by contract, so long as not inconsistent with the securities laws?

To what extent, if any, can changes in technology enhance the effectiveness and efficiency of regulatory action?

For purposes of Commission action in this area, if any, who should be considered to be "retail investors"?

For purposes of Commission action in this area, if any, how should "investment advice" be defined?  Should certain activities be expressly excluded from the definition of "investment advice"?

What are the expected benefits, costs, or other economic effects, whether direct or indirect, of the potential approaches that the Commission could consider in this area, on retail investors, market participants, and on the market for investment advice more generally? 

“In addition to specific suggestions for any potential action, I invite you to submit data and other information that may inform the Commission's analysis, including data covering periods since the Commission's 2013 solicitation,” Clayton wrote. Commentary can be provided via webform or e-mail.

 

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