SEC forging ahead on fiduciary rule despite DOL rule decision in 5th Circuit

Chairman Jay Clayton says 'the sooner the better' when asked when an SEC fiduciary rule will be ready

Mar 19, 2018 @ 2:20 pm

By Mark Schoeff Jr.

Securities and Exchange Commission Chairman Jay Clayton said Monday that the agency is moving forward on a fiduciary rule and its work would not be affected by a court decision last week that struck down a similar Labor Department regulation.

On Thursday, the 5th Circuit Court of Appeals vacated the DOL fiduciary rule, which requires brokers to act in the best interests of their clients in retirement accounts. The regulation was partially implemented last year but the remaining provisions are being reviewed under a directive from President Donald J. Trump that could lead to major changes.

At the Securities Industry and Financial Markets compliance and legal seminar in Orlando, Fla. on Monday, Mr. Clayton said that the SEC is forging ahead despite the doubt now surrounding the DOL rule's fate. The SEC rule is expected as early as this summer.

"Seventy-two hours later [after the court ruling was handed down], it hasn't affected the way I'm approaching this," Mr. Clayton said. "I haven't had any discussions with DOL about what it means from a broader perspective of administrative law. But, as far as I'm concerned, we're moving forward."

In terms of a timetable for a proposal, Mr. Clayton added, "From my perspective, the sooner the better."

DOL appeal uncertain

A Trump administration official said it's unclear whether the DOL will appeal the 5th Circuit ruling to the Supreme Court.

"I don't have any insight into that at this time," Craig Phillips, Treasury Department counselor, said on a SIFMA conference panel later in the morning.

The court ruling "gives us an opportunity to look at this space freshly," Mr. Phillips added.

He noted that the fact that the DOL rule is partially in effect "creates a dilemma for the industry. Thoughtfully moving forward is key, and we have great confidence in Chairman Clayton to do so."

SIFMA was one of several financial-industry plaintiffs in the 5th Circuit suit.

Mr. Clayton suggested that an SEC rule should set the framework for regulating a client's interactions with an investment adviser or broker, which he said could now involve up to five different regulators, depending on the products in the client's account.

"I would like the SEC's action in this area to be the focal point around which people say, 'Yes, that's how we should look at the relationship; that's the basis on which you should have to demonstrate compliance,'" Mr. Clayton said.

While the SEC's moves ahead, the DOL will have a few weeks until its rule takes full effect to decide whether to appeal the 5th Circuit ruling.

There is a difference of opinion whether the court's vacating of the DOL rule will have an effect beyond the court's jurisdiction — Texas, Louisiana and Mississippi.

In a recent analysis, the law firm Gibson Dunn, which was the legal counsel for the plaintiffs in the DOL lawsuit, said that it kills the rule nationally. But in its own report, The Wagner Law Group said that the court ruling takes the DOL regulation off the books only in the southern U.S. states covered by the 5th Circuit.

If the DOL decides to appeal, there's also a question of whether the Supreme Court would take up the case because there's not a stark split in circuit decisions. A 10th Circuit Court of Appeals ruling earlier this month to uphold the DOL measure covered a much narrower part of the regulation than the 5th Circuit decision.

"The administration will have to make a decision, and it really will be a political decision: Do we appeal this or not?" Jeffrey T. Brown, senior vice president for legislative and regulatory affairs at Charles Schwab & Co. Inc., said on a SIFMA panel. "I don't think we really know where we are with this."

SEC's proposal

The other unknown is what the SEC will come up with for its own proposal. Mr. Clayton reiterated that his goals include articulating a standard of care for broker-dealers, who currently must adhere to suitability requirements; clarifying the current investment-adviser fiduciary standard, which requires them to act in the best interests of their clients, and delineating the differences between the two kinds of financial professionals.

The latter effort likely will depend in large part on disclosure.

"We can do that in a fairly short, plain-English, accessible document," Mr. Clayton said.

He acknowledged that the debate over fiduciary duty often is tense.

"This is one of those issues where's there's a lot of emotion," Mr. Clayton said. "What we've been trying to do, and we will see if people agree with that, is bring some real analysis to this space — understanding what is in the best interests of what we think of as your ordinary investor."

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