Clayton tells lawmakers advisers can skirt fiduciary standard

SEC chairman refuses to give specific time line for final advice-reform rule, but says it's a priority

Dec 11, 2018 @ 2:08 pm

By Mark Schoeff Jr.

Securities and Exchange Commission chairman Jay Clayton told lawmakers Tuesday that investment advisers can dodge a requirement to put their clients' interests ahead of their own if they put exceptions in their client agreements.

In an appearance before the Senate Banking Committee, Mr. Clayton said the "baseline standard" for advisers is to act in the best interests of clients. But not all of them adhere to that duty.

"Advisers are allowed to contract around this standard; it's not well known," Mr. Clayton said. "This is something that we want people to understand."

Under questioning from Sen. Elizabeth Warren, D-Mass., Mr. Clayton said the goal of the agency's advice-reform proposal is to hold brokers to the same fundamental requirement as advisers — that they must act in the best interests of their clients — while keeping adviser and broker regulation separate.

"It's the same, but it's a different type of relationship," Mr. Clayton said. He describes advisers as working with clients on an ongoing basis and brokers working on a transactional basis.

Ms. Warren pressed Mr. Clayton to clear up the semantics in the SEC proposal, saying the agency's own investor testing showed that customers don't understand the differences between brokers and advisers.

"If it's the same, just use the same words," she said.

"We may do that," he said.

Later, Mr. Clayton told Sen. Catherine Cortez Masto, D-Nev.: "The bedrock principle is that I can't put my interests ahead of my clients' interests."

In another exchange, he said broker sales incentives designed to increase assets under management don't violate a client's best interests, but that programs to increase sales of specific products can be harmful.

"What [investors] don't want are hidden incentives," Mr. Clayton said.

Echoing the doubts of most investor advocates, Ms. Warren asserted that the SEC's proposal fails to raise broker advice requirements above the current suitability rule that governs them because the measure does not put them under the same fiduciary standard that advisers must meet.

"We need a clear, uniform fiduciary standard for advisers and brokers," Ms. Warren said. "It's the only way to make sure that people who are trying to save for their kids' college education or their retirement are getting the advice that is best for them instead of what's most profitable for the person giving the advice."

In his written testimony, Mr. Clayton said the SEC proposal strengthens investor protections because it requires brokers to mitigate conflicts of interest.

"This is a significant and critical enhancement, as today the federal securities laws largely center on conflict disclosure rather than conflict management," he wrote. But some critics say the SEC proposal would allow disclosure to satisfy mitigation.

The SEC has received more than 6,000 comment letters on its proposal. The agency is expected to release a final rule by the middle of next year, but Mr. Clayton refused to specify a time line.

"It's on the near-term agenda, and it's a priority for me," Mr. Clayton told reporters after the hearing.

For the moment, the SEC is at full strength with five commissioners. But Democratic member Kara Stein must step down at the end of the year. The Trump administration has not nominated anyone for the seat.

Mr. Clayton declined to say whether he would seek a vote on a final advice rule prior to Ms. Stein's successor joining the commission.

"We just move forward, as things go," he said.


What do you think?

View comments

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print