SEC Work with DOL on Standards of Conduct Already Underway

SEC chairman Jay Clayton’s testimony before a Senate committee was not limited to cybersecurity. He also used his September 26 testimony before the Senate Committee on Banking, Housing and Urban Affairs to address other topics, including developing standards of conduct for advisers and broker-dealers – and let Congress and the public know that collaboration with the Department of Labor on these standards has already begun.

"We are engaging expeditiously and constructively with our colleagues at the DOL to best serve the interests of investors," he testified, although he did not provide any details into what has been involved so far in the collaboration between the agency and the Department.

"While the SEC and the DOL have different statutory mandates, rulemaking processes and jurisdictions, actions taken by one regarding standards of conduct are going to have a significant effect on the other’s regulated entities and the marketplace," he said. "In other words, effects of the DOL Rule extend well beyond the DOL’s jurisdiction, and vice versa."

"It is important that we understand these effects and work closely and constructively with DOL to implement appropriate standards of conduct for financial professionals who provide advice to retail investors," Clayton said.

"I am encouraged by Clayton’s assurance that the SEC is engaging expeditiously and constructively with the DOL," said Mayer Brown partner Lennine Occhino. "I also find his testimony on standards of conduct very encouraging. Specifically, I like the fact that the SEC is seeking to develop standards for financial professionals that are consistent across retirement and non-retirement assets and coordinated with other regulatory entities. This will certainly help to reduce confusion and risk for all parties resulting from managing conflicting standards of conduct, even for dealings with the same customer."

"I think we can say safely that Clayton’s testimony shows an interest and willingness to work with other agencies in devising more uniform standards of conduct, which may well affect the fate of the DOL fiduciary rule," said Skadden Arps ERISA counsel Jeffrey Lieberman. "However, it is still far too early to have a real sense of what the effect might be."

Clayton, in his testimony, also addressed a plethora of other topics, including the agency’s regulatory agenda, disclosure effectiveness, enforcement and examinations. While he revealed little that was new – he has, after all, been on the job only since May – he made clear that he is on top of these areas and plans to move the agency forward in addressing them.

The DOL Rule and the SEC

The DOL earlier this year adopted a final Fiduciary Rule for broker-dealers and other financial entities that make retirement investment recommendations. While the Rule formally went into effect June 1, much of it and its related exemptions were postponed until January 1, 2018 – and recently the DOL proposed delaying key exemptions further, until July 1, 2019. As for the parts of the Rule that did take effect June 1, the DOL has said they will not be enforced until January 1.

Most of these postponements took place after President Donald Trump issued a presidential memorandum that, among other things, called for further study on the Rule and its effect on investors.

A DOL Fiduciary Rule has long been a controversial topic within the asset management community, as investment advisers – who would be covered under the DOL Rule if they make retirement investment recommendations – are already covered by a fiduciary obligation under the Advisers Act.

Both Labor Secretary Alexander Acosta and Clayton have recently begun making noises about coordinating their efforts. The SEC in June issued a call for comments on just what the agency should do in terms of developing a standard of conduct for advisers and broker-dealers, and has received more than 150 comment letters to date, Clayton said in his testimony.

Whatever standards the Commission may develop "should be clear and comprehensible to the average investor, consistent across retirement and non-retirement assets, and coordinated with other regulatory entities, including the DOL and state insurance regulators," he said.

Industry changes already underway

Clayton also shared with the committee his awareness of industry changes since the DOL Fiduciary Rule took effect in June.

"Staff conversations with investors and firms, prior to the DOL’s proposed extension, as well as various press reports, indicate that broker-dealers are considering, and some have started taking, a variety of actions to comply with the DOL Rule." These, he said, include:

• Increasing compliance resources and efforts, such as for disclosure, documentation and training in regard to costs and rollover recommendations;
• Increasing the use of robo-advice; and
• Reevaluating and changing the types of products and accounts, as well as related fees, offered to retirement investors, "focusing particularly on products or accounts that would address the compliance requirements driven by the best interest contract exemption," such as shifting some or all of their retirement accounts to level-fee advisory accounts.

He also shared agency staff knowledge that mutual fund complexes are considering different approaches to accommodate what broker-dealers are doing to level compensation across similar types of products in response to the DOL Rule. These approaches, he said, include:

• Issuing what are known as "clean shares" that do not have sales loads, charges or other asset-based fees for sales or distribution, which would have the effect of allowing brokers to set their own commissions that could be paid directly by investors; and
• Issuing "T-shares," also known as "transaction shares," that have uniform sales charges across all fund categories.

The Commission and the agency staff, Clayton said, "have extensive experience regulating broker-dealers and investment advisers, and we are reviewing the information interested parties have submitted." He added that he is looking forward to continuing his work with commissioners and the staff "as we evaluate our next steps on this important topic."