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News January 15, 2018 Issue

SEC May Propose Its Own Fiduciary Rule by Second Quarter

It’s an ambitious target, but the SEC is reportedly planning to propose a Fiduciary Rule that would cover all brokers – not just those selling retirement accounts – by the second quarter of this year. That could mean that there will be a proposed rule in about 10 weeks, but it could also mean in about five months, depending on whether "by the second quarter" means the beginning or the end of that quarter.

Whichever interpretation proves to be correct, it would appear that the SEC is indeed accelerating its work on an agency Fiduciary Rule, as reported by the Wall Street Journal January 10. While a broad-based rule that affects all brokers might resolve some of the concerns about the existing Department of Labor Fiduciary Rule, it raises some new questions, as well.

The SEC’s work would also possibly include a ban on brokers calling themselves "financial advisers" unless they first accept a strict duty of loyalty to clients, the Journal said.

SEC chairman Jay Clayton has, since taking office, said that producing a Fiduciary Rule is a priority. The agency also recently included it in its near-term agenda list of planned priorities for 2018 (ACA Insight, 1/1/18). The SEC declined to comment on whether it plans to propose a rule by the second quarter.

"We’re also hearing that the SEC is looking to propose a rule in the first half of the year," said Investment Adviser Association president and chief executive officer Karen Barr, adding that expecting it by the beginning of the second quarter might not be realistic. The IAA has long been concerned about brokers holding themselves out as fiduciaries, including by using the term "financial adviser." As currently used, Barr said, the term muddies the distinction between true investment advisers – who are fiduciaries – and other financial professionals who are not.

The IAA’s official position on an SEC fiduciary action is that it wants the agency to keep its existing fiduciary standard for advisers, while creating a separate, "equally robust" standard for brokers, she said (ACA Insight, 9/18/17).

"If they can muster a proposal by the second quarter, that would be quick work indeed," said Willkie Farr partner and former SEC deputy chief of staff James Burns. "The complexity surrounding the issue hasn’t really subsided in the years since Dodd-Frank advanced the issue front and center. In the meantime, various constituencies have sharpened their arguments – and there is the overlay of the DOL Fiduciary Rule that adds complexity to the substance as well as the economic analysis. Finally, the Commission itself will be adding two new members to its number and we have yet to see what they will insist should be included in such a proposal merely to allow it to leave the exit terminal."

"All that said," he added, "the issue is ripe – overdue in fact – for progress. It would be a great accomplishment and testament to the chairman, commissioners and SEC staff if they can successfully advance the ball this year."

There remains some skepticism about whether a proposed rule could be issued even within the first half of the year. "Any notion of the first half of the year may be somewhat ambitious," said Stradley Ronon counsel George Michael Gerstein. "You have two new commissioners, Clayton is still relatively new, there is a new assistant secretary of labor who will be directly involved, the SEC is still reviewing responses from a call for comments, plus it will need regular communication with both the DOL and the states."

The states, in fact, are the new concern, Gerstein said. Nevada, New York, New Jersey and others, he said, are currently considering laws and/or regulations that address some aspect of fiduciary duty for brokers, and they will need to be at the table with the SEC and the DOL. "There’s a triangulation of regulations among these three which has created a very dynamic situation. The states are going to have to be part of the discussion. The last thing anyone wants is for there to be a patchwork of regulations. "

That said, Clayton and DOL secretary Alexander Acosta appear to be moving in the same direction, with both commenting in recent months that they want the SEC and the DOL to cooperate in resolving the situation (ACA Insight, 10/2/17).

How it will all work out, and how long it will take, even once the SEC issues its proposal, remains to be seen. One possibility, Gerstein said, is that the SEC might issue a uniform standard that effectively contains most, if not all, of the conditions of a related DOL prohibited transaction exemption, which would mean that satisfaction of one could help satisfy the other.

While the existing DOL Rule is in effect, the DOL is currently not enforcing certain key exemptions, such as the Best Interest Contract Exemption, that are tied to it, and won’t until July 2019. That might allow the SEC time to issue its own proposal and work with the DOL and the states to resolve the entire matter.

Unless, of course, as has proved the case, resolving the matter requires still more time.