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News June 12, 2017 Issue

SEC Seeks Updated Assessment on Need for Uniform Standard of Conduct

New SEC chairman Jay Clayton dipped his and the Commissionís toe back into the waters of a possible uniform Fiduciary Rule for advisers and broker-dealers. The end result may be a uniform standard of conduct or something else.

In his first public statement since becoming SEC chairman last month, Clayton picked up on an invitation from secretary of labor Alexander Acosta to work together. Clayton said he welcomed the invitation and, as part of what he described as an updated†assessment, called for public comment on questions relating to 17 topics, including the need to address retail investor confusion,†potential conflicts of interest, and market developments and technology.

"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 Commissionís ability to evaluate the range of potential regulatory actions," he said.

The SEC last sought information from the public on this topic in 2013, but since then, said Clayton, there have been "significant developments in the marketplace," among them financial innovations, changes to adviser and broker-dealer business models, and regulatory†developments (including the DOL Fiduciary Rule).

The end result of this new assessment and subsequent Commission discussions is most likely months, if not years, away. Clayton, in his public statement calling for comments, described a range of actions, based on previous suggestions to the agency, as "broad." He left open the possibility that the updated assessment may suggest further options. Those he described included:

  • Maintaining the existing regulatory structure,
  • Enhanced disclosures to mitigate reported investor confusion,
  • Development of a best interests standard of conduct for broker-dealers, or
  • A single standard of conduct combined with harmonization of other rules and regulations applicable to both advisers and broker-dealers when they provide advice to retail investors

The DOL Fiduciary Rule and the SEC

The DOL Fiduciary Ruleís applicability date, meanwhile, was June 9. That Rule, unlike the standards of conduct the SEC will gather information on, relates to advisers, broker-dealers and others in regard to their advice to retail investors on retirement investments. This is because ERISA regulations, which address retirement, fall under the DOL. The Rule generally does not address non-ERISA investments.

The SECís review and any possible future action will cover a wider range of investments by retail investors, although retirement investments would be among them Ė and it is here where efforts by the SEC and the DOL to "engage constructively," as Clayton put it, may be the path forward.

"I believe clarity and consistency Ė and, in areas overseen by more than one regulatory body, coordination Ė are key elements of effective oversight and regulation," he said.

Acosta, in a May 22 op-ed in the Wall Street Journal in which he discussed the Departmentís Fiduciary Rule, noted that "the SEC has critical expertise in this area. I hope in this administration the SEC will be a full participant."

A uniform Fiduciary Rule for advisers and broker-dealers has been a topic under consideration by the SEC for several years, with former chair Mary Jo White coming out in favor of it in 2015. She was unable to move forward on such a rule, however, before leaving office at the end of President Obamaís term.

"It is reasonable to expect that the SEC will have a serious and substantive role in determining how the Fiduciary Rule evolves during the Trump administration," said Mayer Brown partner Brian Netter.

"During the Obama Administration," he said, "the SEC was on the sidelines for the crafting of the Fiduciary Rule. Despite agreeing to let portions of the Fiduciary Rule enter into force now, the current Administration has signaled that it intends to revise it. Introducing the SEC into the equation would seem to give the Administration greater flexibility in devising new policies."

"The legal and political backdrop against which the SEC and the DOL determine their common or distinct interests on fiduciary standards, and the defensibility of such positions, is very complex, but some signals are emerging for some sort of coordinated action," said Wagner Law Group partner Stephen Wilkes. "Given the convergence within the advisory world such that retirement and taxable accounts are addressed for the same client by the same firm, the logic of a uniform standard is appealing. But it is way too early to really see where this is going other than to note that the final story on fiduciary definitions and standards is not yet written."

Topics and questions

Following is a summary of some of the topics and questions posed by the agency. Clayton also invited the public to submit data and other information that might be helpful.

The SEC did not set a deadline for responding. Those wishing to do so may submit on the web or by email, each accessible via a link found at the bottom of Claytonís public statement.

  • Retail investor confusion. "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," the SEC says in introducing this set of questions. Included are the extent to which this reported confusion has been addressed; if meaningful confusion remains, whether the confusion is harming retail investors or resulting in other costs; and the disclosures, advertising or other information that advisers and broker-dealers provide to retail investors.
  • Potential conflicts of interest. Questions include whether potential conflicts of interest related to the provision of investment advice to retail investors in various circumstances have been appropriately identified and, if so, addressed; particular areas where conflicts are more prevalent, have greater potential for harm, or both; and whether there are steps the SEC can take to identify and address these conflicts.
  • Market developments and advances in technology. Developments like robo-advisers and fintech "continue to transform the way in which retail investors obtain advice," the agency says. Questions in this area include how retail investors perceive the duties that apply when investment advice is provided in new ways or by new market entrants; how market developments and advances in technology should affect the SECís consideration of potential future actions; and the steps that the agency should take, if any, to address potential confusion or lack of information in these emerging areas.
  • Fee-based advisory model vs. commission-based model. Among the questions that the SEC wants answers to are whether there is a trend in the provision of retail investment advice toward a fee-based advisory model and away from a commission-based brokerage model; how any observed trend has impacted the availability, quality or cost of other investment products and services for retail investors; and whether such trends raise new risks for retail investors.
  • Compliance with the DOL Fiduciary Rule. The agency noted that even though the applicability date of the DOL Rule had not yet passed at the time these questions were posted, efforts to comply with the Rule were reportedly underway. "What has been the experience of retail investors and market participants thus far in connection with the implementation of the Fiduciary Rule? How should these experiences inform the Commissionís analysis? Are there other ways in which the Commission should take into account the Department of Laborís Fiduciary Rule in any potential actions relating to the standards of conduct for retail investment advice?"
  • Differing standards of conduct. "As of the applicability date of the [DOL] Fiduciary Rule, there will be different standards of conduct for accounts subject to the Department of Laborís Rule and those that are not, as well as existing differences between standards of conduct applicable to broker-dealers and those that are applicable to investment advisers when providing investment advice," the SEC states in this question group. Just one question is listed: "What are the benefits and costs of having multiple standards of conduct?"