Fiduciary Corner

Time for SEC to take fiduciary baton from DOL

The SEC likely will adopt the DOL's definition of fiduciary, and put a rule in place by the end of 2019

Jan 2, 2018 @ 11:11 am

By Blaine F. Aikin

With the core of the DOL fiduciary rule in place and the rest of it delayed for 18 months, can advisers expect all to be quiet on the fiduciary front in 2018? In a word, no. The regulatory baton has been passed from the DOL to the SEC and it's likely we will see an SEC fiduciary rule proposal by midyear, perhaps even in the first quarter.

During the Obama administration, DOL officials expressed frustration with the SEC for failing to engage in fiduciary rulemaking. Under the Trump administration, SEC officials blame the DOL's previous leaders for moving ahead without them. Now the SEC and DOL appear to be working together to bring fiduciary rulemaking at the agencies into alignment.

Since being sworn into office in May, SEC Chair Jay Clayton has repeatedly said that the SEC will move forward with its own fiduciary rule and called it a high priority. Clayton's sense of urgency is well-founded. Financial firms that have dually registered advisers are caught between a rock and a hard place when it comes to current fiduciary standards.


The DOL rule now requires robust and consistent fiduciary accountability for advice rendered in retirement accounts. The SEC requires strong fiduciary accountability for those who are registered investment advisers but has allowed non-registered broker-dealer representatives to give virtually indistinguishable forms of advice without registering as RIAs and without fiduciary accountability.

An adviser must act in a fiduciary capacity when giving advice about retirement accounts for a client but can switch hats to provide non-fiduciary advice on non-retirement assets for that same client. It is inexplicable to clients as to why this drop-off in accountability makes any sense. This is especially true in the case of an IRA that was previously advised under a suitability standard and now must be advised in a fiduciary capacity due to the DOL rule.

(More: New DOL, SEC officials help advance fiduciary rule work)

The current situation is untenable for the SEC because it is untenable in the marketplace. The most efficient and effective way to rectify the current regulatory imbalance is for the SEC to take the lead and for the DOL to tweak its rule to align with what the SEC decides to propose.

Based on what the regulators have been saying publicly and privately, and considering the practical realities of what current laws and regulations require, it is possible to make an educated guess as to what the SEC's fiduciary rule proposal might include. Here's a rundown.


1. The SEC will adopt the DOL's definition of fiduciary with little or no change because firms are already adapting to it and it can't be materially weakened without running afoul of statutory ERISA requirements.

2. No new private right of action will be created, which means the contract requirement of BICE in the part of the DOL rule that is delayed will go away. This means the SEC will regain primary enforcement power over IRAs.

3. A carve-out will be provided to make it clear that self-directed brokerage accounts (where the client does not seek or receive personalized advice) does not entail fiduciary responsibility for trade facilitation. Special provisions will be needed to clarify the dividing line between fiduciary and non-fiduciary activities in call centers.

4. Strict controls will be crafted to address "hat-switching." Informed client consent will be required if the adviser wants to change the nature of the relationship.

5. Truthful and proactive "holding-out" obligations will be included. Use of terms like "adviser" or "consultant" will require fiduciary accountability.

6. Adherence to Impartial Conduct Standards — drawn from the DOL rule concept — will be required for fiduciary relationships. The straight-forward ICS requirements established by the DOL are deeply rooted in fiduciary common law and virtually all statutory fiduciary obligations.

7. The SEC will coordinate its rulemaking with state insurance commissioners, who are working on a model rule that would require a "best interest" standard for annuity transactions. It is unclear at this early stage how well that project will harmonize with securities laws and ERISA's much higher standard of conduct.


With respect to timing, let's assume the SEC formulates and releases a proposed fiduciary rule by mid-2018. Following release of the proposed rule, there would be a required public comment period of probably 90 days, refinements made to the rule, re-proposal, another comment period and then a final rule. This would take roughly 18 months, which would directly align with the DOL rule transition period.

(More: SEC and DOL should agree on tough fiduciary rules)

Following adoption, there would likely be an additional transition period before the compliance requirements would take effect. That would bring the whole process to 24 months, meaning the SEC's fiduciary rule could be fully in place by the end of 2019.

Blaine F. Aikin is executive chairman of fi360 Inc.


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