Fiduciary duty rule: No way out

The prospects of rules to better protect investors looked bright four years ago, but have waned

Jul 13, 2014 @ 12:01 am

By Mark Schoeff Jr.

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(Dale Stephanos)

With the outlook for passage of a uniform fiduciary duty now bleak, it's astonishing to think the prospects for strengthening investment-advice rules to better protect investors looked so bright four years ago.

On July 21, 2010, President Barack Obama signed into law the Dodd-Frank financial reform law, giving the Securities and Exchange Commission the authority to write a regulation that would require all financial advisers to act in the best interest of their clients — the fiduciary-duty standard of care that currently applies only to investment advisers.

Three months later, the Department of Labor proposed a rule that would expand the definition of “fiduciary” to financial advisers helping clients with retirement plans, including brokers selling individual retirement accounts.

What was promising momentum has turned into a slog that bogged down further this May, when the DOL announced that it would delay a reproposal of its rule from August to January 2015.

And the SEC is still deciding whether to advance a fiduciary proposal at all.

In July 2013, the comment period ended for a request for information for a cost-benefit analysis of a potential regulation. But last month, Stephen Luparello, director of the SEC Division of Trading and Markets, told a congressional panel the agency might have to gather more data before deciding how to proceed.


“We're at a four-way stop, and everyone is being really polite,” said Brian Hamburger, president of MarketCounsel, a compliance consulting firm for advisers. “I expect more discussion and dialogue, and absolutely no rule making.”

The DOL measure is much further along than its SEC counterpart, though the original DOL

proposal was withdrawn after fierce attacks by the financial industry. Opponents argued it would raise liability and regulatory costs for brokers, causing them to stop serving the retirement plan market and potentially hurting investors with small accounts.

Labor Secretary Thomas Perez promised during his Senate confirmation hearing last year that he would listen to all stakeholders. He's undoubtedly already heard from agents like Rick Rice.

“If you impose a fiduciary standard on agents like myself, you'll take us out of the market and make our services unavailable to middle America,” said Mr. Rice, a financial representative for Mass Mutual. “I'm sure my E&O coverage would go up substantially, and I can't afford to talk to my clients without them helping to cover that overhead.”


Mr. Rice made his argument to lawmakers during the National Association of Insurance and Financial Advisors lobbying day in May.

On the other side, Barbara Roper, director of investor protection at the Consumer Federation of America, has spoken in favor of fiduciary duty on Capitol Hill and with regulators for many years. She asserts that brokers portray themselves as advisers when their duty of loyalty is to their firm, not clients. A uniform standard would help investors know what they're getting.

“It's about distinguishing advice from a sales pitch,” Ms. Roper said.

Although there's general support in the financial industry for an SEC fiduciary-duty rule that applies to retail investment advice, deep concerns remain about how the regulation would work for brokers. They currently meet a suitability standard, which lets them sell higher-priced investment products.

SEC Chairman Mary Jo White has said that bringing the five-member commission to a fiduciary-duty decision is one of her top priorities. She has instructed staff to prepare a list of options, including ones that may fall short of a rule.

“If it's this hard to make a decision on whether to engage in rule making, how hard will it be to reach consensus on a final rule?” Ms. Roper said.

That's especially true because Ms. White faces a split commission.

“This is not important,” SEC Commissioner Daniel Gallagher said in an interview. “Fiduciary duty is neither [financial]-crisis related nor urgent in that we've identified a market problem.”


Mr. Gallagher's Republican colleague, Michael Piwowar, also has expressed reservations. He has described a fiduciary-duty rule publicly as a “very, very, very difficult issue.”

Neither Mr. Piwowar nor Ms. White responded to an interview request.

Proceeding on a 3-2 vote, with Ms. White joining commission Democrats Kara Stein and Luis A. Aguilar, “would be very disappointing, because there would be ensuing litigation,” Mr. Gallagher said. “The agency would have a tenuous position in defending such a rule, as it didn't have full commission support,” he added.

Courts have vacated SEC rules in part because they were not passed unanimously.

DOL Assistant Secretary Phyllis Borzi is trying to push the regulation — renamed the “conflict of interest rule” — over the finish line.

Ms. Borzi did not respond to an interview request.

But the industry is still balking.

The Securities Industry and Financial Markets Association said it supports an SEC rule if it is written within Dodd-Frank's parameters, which include providing safe harbor for charging commissions.

How the financial industry responds to a DOL re-proposal hinges on so-called prohibited-transaction exemptions, according to Fred Reish, a partner at Drinker Biddle & Reath.

Mr. Reish will be watching for one that lets brokers receive different revenue from products in IRAs. Under retirement law, adviser income must be level among all products sold.


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