Battle lines form as SEC considers new fiduciary rule

Investment Adviser Association warns agency against a 'harmonized' standard; opponents of DOL fiduciary rule say disclosure works fine

Sep 6, 2017 @ 2:10 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission should not blend investment-advice standards that apply to investment advisers and brokers, as the agency considers a new advice rule, the Investment Adviser Association said in a recent comment letter.

The letter is one of dozens the SEC has received since putting out a June 1 request for comment on fiduciary duty. There is no firm deadline on responses, but the feedback so far indicates that the debate over advice is once again breaking down between those who say that brokers should meet the same kind of best-interest standard that governs investment advisers and those who say that tweaking the suitability standard that applies to brokers would do the trick.

The IAA said the SEC should raise the advice bar for brokers without trying to split the difference between advisers and brokers.

"Pursuing a single 'harmonized' standard of conduct would not effectively serve investors because it would result in a weakening or 'watering down' of the existing robust fiduciary standard applicable to investment advisers," Gail Bernstein, IAA general counsel, wrote in an Aug. 31 comment letter.

The IAA urged the SEC to amend the Securities Exchange Act of 1934 to create a new best-interest standard for brokers that is "no less stringent" than the advice standard for advisers that has evolved from the Investment Advisers Act of 1940.

The SEC waded back into the intense debate over advice standards in response to the Labor Department's fiduciary duty rule that was partially implemented in June. That measure is undergoing a review mandated by President Donald J. Trump that could lead to changes. The SEC has failed to propose its own fiduciary rule, even though it was authorized to do so by the 2010 Dodd-Frank financial reform law.

Brokerage industry advocates and firms are telling the SEC to enhance the suitability standard and rely on disclosures. Under suitability, a broker can recommend high-fee investments, even if lower-cost ones are available, as long as they that meet an investor's goals, risk appetite and other factors.

The Investment Company Institute outlined a broker best-interest standard that would require a broker to put the client's interests first, act with care and prudence and charge "fair and reasonable compensation."

"The standard would require appropriate disclosures, including of material conflicts," wrote Dorothy Donohue, ICI acting general counsel, in an Aug. 7 comment letter.

Fidelity Investments doesn't want the SEC to stray too far from current broker regulation.

The SEC "should ... develop standards that are principles-based and primarily implemented through disclosure consistent with the SEC's long-standing approach to broker-dealer regulation," wrote Marc R. Bryant, Fidelity senior vice president and deputy general counsel, in an Aug. 11 comment letter.

But advocates of the DOL rule said that the SEC should take note of that measure's provisions to mitigate conflicts of interest, such as when firms give brokers incentives to sell certain investment products.

"Experience since the DOL rule was adopted has shown that it is possible to rein in such conflicts," many consumer groups wrote in an Aug. 21 comment letter. "The result has been numerous pro-investor innovations, helped along by the SEC's approval of 'clean shares,' among other things."

If the SEC fails to promulgate a fiduciary rule, the agency should crack down on brokers who call themselves advisers, the IAA said.

"To the extent the commission does not adopt an equally stringent standard under the Exchange Act, it should prohibit firms or individuals that are not subject to the Advisers Act fiduciary standard from holding themselves out in a manner that implies a fiduciary relationship," Ms. Bernstein wrote.


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