Bogle: Apply fiduciary duty to anyone 'touching other people's money'

Vanguard founder calls on the SEC and DOL to 'put the principle first and the carve-out second'

Dec 10, 2013 @ 3:03 pm

By Mark Schoeff Jr.

john bogle, fiduciary duty, department of labor, securities and exchange commission, vanguard, labor department
+ Zoom
(Bloomberg News)

A longtime financial markets leader called on federal regulators Tuesday to stiffen their spines and propose rules that would require everyone providing investment advice to act in the best interests of their clients.

There is widespread opposition to fiduciary duty rules being considered by the Labor Department and the Securities and Exchange Commission, John Bogle, founder of The Vanguard Group Inc., said by telephone at a conference in Washington sponsored by the Institute for the Fiduciary Standard.

But instead of focusing on safe harbors for certain kinds of brokerage activities, the agencies should keep the big picture in mind, he said.

“There has to be at some point a great willingness of the government — particularly the SEC and also the Labor Department — to take responsibility for making sure that if you're touching other people's money, you are a fiduciary,” Mr. Bogle said from Philadelphia, where he was stuck due to inclement weather. He acknowledged that some accommodations would have to be made in fiduciary duty rules that allow brokers who are strictly sales representatives to continue to do their jobs.

“The overriding thing is to put the principle first and the carve-out second, if we need one,” he said.

The Labor Department and SEC are working on separate fiduciary duty rules.

The Labor Department regulation would expand the term “fiduciary” as it applies under federal retirement law to any financial adviser working with 401(k) and other qualified plans as well as individual retirement accounts. The SEC's rule would establish a uniform fiduciary standard for anyone providing retail investment advice.

The Labor Department originally proposed a rule in 2010 but withdrew it after strong opposition from the financial industry, which argued that it would subject brokers in the IRA market to fiduciary duty for the first time.

In a recent regulatory calendar, the Labor Department said that it would re-propose its rule next August.

The SEC recently put its measure on its “long-term actions” calendar.

One industry representative said that the opposition to the Labor Department rule doesn't revolve around fiduciary duty.

The bigger concern is that the original DOL proposal wouldn't have permitted brokers to receive revenue-sharing or 12(b)-1 fees from funds within IRA or plan products, said Kent Mason, a partner at Davis & Harman.

The amount of the fees vary within IRAs and plans, a situation not permitted for advisers under federal retirement law.

“If this was about the best-interest issue, this would have been over in 2011,” Mr. Mason said in an interview.

“The brokerage model is illegal as it's currently structured [under the original DOL rule],” he said. “That's the issue.”

Under the law, investment advisers must act in the best interests of their clients or meet a fiduciary standard. Brokers are held to a less stringent suitability rule when selling investment products.

A former SEC official told the conference that it would be difficult for the commission to craft a uniform fiduciary standard that would satisfy advocates in the audience.

If the SEC is able to propose a best-interests standard, it would accommodate elements of the brokerage business, such as principal trading, rather than subject it to the adviser standard.

Part of the reason is that brokers are better funded and organized politically than advisers, said Robert Plaze, a partner at Stroock & Stroock & Lavan.

“The SEC is not going to threaten the broker-dealer business model,” he said. “Broker-dealers are the market.”

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