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.


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