SEC's Clayton says agency is 'pushing' toward a fiduciary rule, working with DOL

While the Senate Banking Committee hearing focused on the regulator's recent cyberbreach, significant discussion revolved around fiduciary duty, which the SEC chairman called 'a priority for me'

Sep 26, 2017 @ 2:24 pm

By Mark Schoeff Jr.

For the past week, Securities and Exchange Commission Chairman Jay Clayton has had his hands full dealing with cybersecurity, following the agency's disclosure of a breach that may have led to illegal trading. But he told lawmakers on Tuesday that investment advice regulation remains a top priority.

Mr. Clayton's appearance before the Senate Banking Committee mostly focused on the attack on the SEC's corporate filing system. Republican and Democrats criticized the agency for waiting more than a year before revealing that the intrusion had occurred.

But there also was bipartisan interest in the SEC's work on a rule to raise investment advice standards for brokers and its efforts to catch up with the Department of Labor, whose own fiduciary rule for retirement accounts partially went into effect in June. The DOL has proposed delaying the Jan. 1 applicability date for the enforcement mechanisms of the regulation for 18 months, while it conducts a review of the rule directed by President Donald J. Trump that may lead to revisions.

"Everything can't be a priority. This is a priority for me," Mr. Clayton said of a potential SEC fiduciary rule. "We're pushing this one. This is the top of my list in that area [the Division of Investment Management] of the commission."

The SEC has not proposed a fiduciary rule in the seven years since being given the authority to do so in the Dodd-Frank financial reform law due to deep divisions on the issue among SEC commissioners. In June, less than a month after he was sworn in, Mr. Clayton issued a request for comment on fiduciary duty.

Critics of the DOL rule say it is too complex and costly and would price investors with modest assets out of the advice market. Proponents say the regulation, which requires brokers to act in the best interests of clients when giving retirement investment advice, mitigates conflicts of interest that lead to inappropriate, high-fee investment products that erode savings.

Sen. Tim Scott, R-S.C., a former financial adviser, said surveys of advisers show they are abandoning small accounts due to increasing compliance costs and legal risks.

"These folks desperately need the experts to make good, sound financial decisions," Mr. Scott said.

In response, Mr. Clayton outlined the four principles he said need to be "reflected in any joint rulemaking we do." Investors have to have a choice in whether to work with a broker or investment adviser, the rule needs to be clear, it must apply consistently across retirement and other investment accounts, and the SEC, DOL and state regulators must coordinate their actions.

He also assured Mr. Scott that the SEC was listening to state insurance regulators when it comes to how a fiduciary rule would affect fixed-income annuities.

"I have been in dialogue with the state regulators since I got on the job, and they will be part of this effort," Mr. Clayton said.

Both Republicans and Democrats on the committee expressed concern about the financial industry having to deal with two fiduciary rules — one from the DOL and one from the SEC.

Sen. Jon Tester, D-Mont., pressed Mr. Clayton on whether the SEC was working with the DOL to "harmonize" investment advice rules "so that people don't get ping-ponged back and forth between two rules."

The top Republican on the Senate Banking Committee, chairman Mike Crapo of Idaho, wants the SEC to take the lead on regulating advice.

"If clarification needs to be made about the standards of conduct for broker-dealers and investment advisers, I believe the SEC has the most expertise and is best positioned to establish consistent standards for all investors," Mr. Crapo said.

Most of the hearing focused on the SEC cyberbreach and the agency's response.

Mr. Clayton didn't reveal any details on the internal investigation. But he stressed that the agency is putting an emphasis on cybersecurity. On Monday, it announced new enforcement initiatives. After requesting no increase in funding for fiscal 2018, the SEC will seek a boost in its budget for fiscal 2019 to better address the area.

"We're going to need more money in the areas of cybersecurity and IT generally," Mr. Clayton said.

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