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News August 21, 2017 Issue

Associations and Firms Want SEC/DOL Coordination on Standard of Conduct

More than 90 comments have been received by the SEC to date in response to agency chairman Jay Clayton’s June 1 call for comments in regard to standards of conduct for investment advisers and broker-dealers. Among the trends emerging from the comments received to date is that the SEC, in coordination with the Department of Labor, create a separate standard of conduct for broker-dealers.

Such a standard, which was proposed in comment letters from the Investment Company Institute, the Securities Industry and Financial Markets Association, and private sector firms including UBS and Franklin Templeton Investments, would be quite different from the DOL Fiduciary Rule that was adopted June 9. That Rule and its related exemptions, once they go into effect, would apply a uniform fiduciary standard to both advisers and broker-dealers, as well as others, who provide retirement investment advice.

If the comments offered by the ICI, SIFMA and others that made similar suggestions are followed, there would be no uniform fiduciary rule, at least not in its present form. Rather, the SEC, working with the DOL, would create a best interest standard of care for broker-dealers, and the DOL would, in some form, basically buy into the SEC action.

"Many of those who sent in comments, particularly smaller advisers and investors, chose to respond by continuing to comment on the DOL Fiduciary Rule and its effects (generally, negative) on their business and investments," said Drinker Biddle partner Kay Gordon. "When the standard of care for investment advisers was addressed, the commenters generally stated that the SEC should not make any changes with respect to the existing fiduciary standard under the Investment Advisers Act of 1940," she said.

However, she said, "when a uniformity of standards was suggested, it was often discussed in the context of the uniformity that should be applicable to retirement and non-retirement accounts rather than investment advisers and broker-dealers."

How is the DOL likely to view these comments? "The DOL’s last request for comments included whether, if the SEC promulgates its own fiduciary standards for broker-dealers that provide advice to retail investors, the DOL should develop a new streamlined exemption for brokers that comply with the SEC standards," said Mayer Brown partner Lennine Occhino.

"DOL secretary Alexander Acosta has also indicated that he sees a need to better coordinate with the SEC in this area," she said. "One of the big concerns expressed by the industry is that the different standards imposed on retirement and non-retirement accounts give rise to confusion and compliance challenges. So coordination between the DOL and the SEC should be helpful."


The ICI, in its August 7 comment letter, said that "the SEC should take the lead in establishing and enforcing a best interest standard of conduct for broker-dealers providing recommendations to retail investors in non-discretionary accounts, across both retirement and non-retirement account."

"The SEC should coordinate closely with DOL so that DOL explicitly recognizes the best interest standard of conduct in a new, streamlined prohibited transactions exemption for financial services providers that are subject to an SEC-governed standard of conduct," the association said. At the same time, it added, "the SEC should maintain the existing fiduciary duty standard for investment advisers that has served investors well for over seven decades."

For its part, SIFMA, in a July 21 comment letter, said that "the SEC should consider a best interest standard for broker-dealers that encompasses a duty of loyalty, a duty of care, and enhanced up-front disclosures." Including these two duties would, it said, have the effect of making the new standard "akin to, and well aligned with, the investment adviser standard under the Advisers Act."

Private firms

Not every commenter can be expected to agree with the ICI and SIFMA, but some came close. Others took a different position.

  • BlackRock took a somewhat different position than the associations in terms of just which firms a standard of conduct should cover. A best interest standard, it said, should apply to both investment advisers and broker-dealers. "A best interest standard applicable to investment advisers and broker-dealers adopted by the SEC should provide a solid basis for addressing both the SEC’s and the DOL’s concerns with existing market practices," it said in an August 7 letter addressed to the DOL but sent to both the Department and the SEC. In a separate comment letter sent the same day to the SEC, it urged the agency to "adopt a uniform best interest standard that applies to all types of retail accounts, whether they are plans or IRAs or non-qualified investment accounts. . . . A uniform SEC best interest standard could advance investor choice and encourage saving and investing in a way that would optimize investment outcomes."
  • UBS, in a July 21 comment letter, said that "we believe that the SEC should develop a best interest standard for broker-dealers that is based on the "impartial conduct standards" articulated by the Department and further should work with the Department to ensure that the SEC or [FINRA] are the authorities responsible for creating appropriate rules and enforcement of such best interest standard (which would apply to both retirement and non-retirement brokerage accounts of broker-dealers). Investment advisers would continue to be governed by the standards of the Investment Advisers Act of 1940."
  • Franklin Templeton Investments, in an August 7 letter, also said that "it is important for the same standard of conduct to apply to all retail accounts for a broker-dealer." The firm said that it "welcomes the SEC’s renewed focus in this area, in particular its willingness to work with the Department of Labor to develop an enhanced standard of conduct that forms the basis for an exemption from the DOL Fiduciary Rule."

The Investment Adviser Association has not yet submitted a comment letter to the SEC in response to Clayton’s call, but plans to in the future, an association spokesperson said.

Clayton’s call

Clayton’s call for comments asked for the public to provide their views on 17 topics, including among them the need to address retail investor confusion, potential conflicts of interest, and market developments and technology.

While some of the commenters asked for the SEC to move expeditiously on resolving the question of a broker-dealer standard – Franklin Templeton stated that it "urge[s] the SEC and DOL to act now so that state legislators and their securities regulators do not feel compelled to step in and regulate where the federal regulators do not" – any new regulations from the SEC may still be at least months away. Clayton himself, in his public statement calling for comments, said there are a broad range of actions to consider, including:

  • 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.

It would seem that the thrust of the comments from the larger industry players so far would be for the third option above, development of a best interest standard of conduct for broker-dealers. That does not mean, however, that some of the other options might also be considered.

Exemptions and the compliance date

The commenters were ahead of the game in one key way. A number of them urged the DOL to extend the January 1, 2018 applicability date of the Best Interest Contract Exemption and other exemptions. In fact, the DOL proposed doing exactly that on August 9 (ACA Insight, 8/14/17), issuing a notice of administrative action stating that it plans to delay the applicability date for three exemptions, including the Best Interest Contract Exemption, to July 2019.

Whether that proposal will become final will depend on the securities industry’s reaction and a number of other factors, as well as how the Department will take those factors into account.

One thing seems clear, however. There currently is a great deal of sturm und drang regarding the issue of a broker-dealer standard of conduct, as well as the DOL Fiduciary Rule and its related exemptions.

Given that the Trump administration is philosophically more opposed to regulations than its predecessor, the number of the DOL extensions that have already occurred preventing the Fiduciary Rule and the extensions from taking practical effect, and both the DOL’s and the SEC’s current re-thinking of their positions, whatever the final regulations and/or guidance issued are likely to be different from the Fiduciary Rule that the Department adopted June 9.