Regulators grapple with how a robo-adviser can be a fiduciary

SEC commissioner Kara Stein says agency is being 'disrupted' by technology along with everyone else

Mar 10, 2016 @ 1:48 pm

By Mark Schoeff Jr.

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Automated investment advice is not only roiling human practitioners, it's also posing a challenge to financial regulators.

Advice rules were written before the advent of online advisers, SEC commissioner Kara Stein said Thursday. Now the agency has to sort out whether a computer program has to act in the best interests of a client, or whether the person who wrote the program must be licensed.

“We're all being disrupted, but regulators are also,” Ms. Stein said at the Investment Adviser Association Compliance Conference in Washington. “What would a fiduciary duty mean to a robo-adviser? Or suddenly, is there no fiduciary duty if it's automated advice? How should the SEC be thinking about that and regulating that?”

The agency is contending with similar issues in market structure, as trading in securities is done through complex computer systems.

“We're being confronted through our entire regulatory structure with how do we deal with an increasingly complex marketplace and what are the rules of the road,” Ms. Stein said.

The Securities and Exchange Commission is in the midst of a long slog on developing a regulation that would impose a uniform fiduciary duty for retail investment advice. The agency was given authority by the Dodd-Frank financial reform law to promulgate such a regulation.

The SEC has not acted in the nearly six years since Dodd Frank was signed into law. Last year, SEC Chairwoman Mary Jo White announced her support for a fiduciary duty rule, and said she would try to build support among fellow commissioners.

But the process continues to proceed slowly, even as the Labor Department is on the verge of finalizing its own fiduciary rule for advice to retirement accounts.

“We don't have a full proposal before us yet,” Ms. Stein told reporters on the sidelines of the IAA conference.

The parameters of an SEC rule outlined in the Dodd-Frank law make it difficult for the agency to write one, according to Neil Simon, IAA vice president for government relations.

For instance, the measure allows brokers to charge commissions and sell proprietary products and limits a continuing duty of care. At the same time, the law says a rule should be “no less stringent” than the 1940 Investment Adviser Act, which was the catalyst for the fiduciary standard of care investment advisers must adhere to today.

“It's very hard to reconcile these things,” Mr. Simon said on a panel at the conference. “Just crafting [a rule] will be an extraordinary challenge, perhaps insurmountable.”

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