A fiduciary standard? Don't hold your breath

Securities and Exchange Commission member Daniel Gallagher doubts that his agency will propose its own rule to raise advice standards for brokers providing retail investment advice.
MAY 20, 2014
Both the Labor Department and the Securities and Exchange Commission may be farther away than supporters had hoped from promulgating fiduciary standards. In a speech in Washington on Wednesday, Labor Department Assistant Secretary Phyllis Borzi said that more work needs to be done before it can re-purpose a rule that would expand federal retirement law investment advice standards to apply to more financial advisers helping clients save for retirement. It has been four years since the Labor Department first proposed the rule. In its current regulatory calendar, the Labor Department said that it would release the rule in August. “We're not quite finished. We haven't made all our decisions,” Ms. Borzi told an audience at a meeting on retirement security sponsored by the Financial Services Roundtable. “We're working slowly and deliberately because it's much more important for us to get it right than meet someone's arbitrary deadline. August is our goal," Ms. Borzi said. "Maybe we will be ready then," she said. "Maybe we won't." At the same event, Securities and Exchange Commission member Daniel Gallagher expressed doubts that the commission will propose its own fiduciary duty rule to raise advice standards for brokers providing retail investment advice. The Dodd-Frank financial-reform law gave the SEC the authority to promulgate a fiduciary-duty regulation, but it hasn't yet moved forward. It is conducting a cost-benefit analysis of the regulatory impact of a potential rule. “At this point, I'm not sure we need to use [the Dodd-Frank authority],” Mr. Gallagher said. “I'm not sure, quite frankly, a majority of the commission believes that or believes we should use it in any way.” SEC Chairman Mary Jo White has said that pushing the five-member commission to a decision on whether to pursue a fiduciary-duty rule is a top priority. Mr. Gallagher told reporters after the meeting that there had not been a discussion among the commissioners about the fiduciary standard since the SEC put out a request for information a year ago to help it draft a cost-benefit analysis. “The chairman is pushing the staff very hard to get us something that will be a decision point,” he said. “I start from the position that it's not necessary until someone proves it out.” Both the Labor Department and SEC fiduciary-duty rules would require advisers to act in the best interests of their clients, a bar that investment advisers already must meet. Brokers adhere to a suitability standard. The Labor Department first proposed its rule in 2010. It withdrew the measure after fierce criticism from the financial industry, which said that it would impose for the first time a fiduciary duty on brokers selling individual retirement accounts and potentially force them out of the market serving investors with modest accounts. The Labor Department's primary motivation in proposing the rule, which would expand the definition of "fiduciary" under federal retirement law, is to protect from conflicted advice small investors who are building their own retirement nest eggs, Ms. Borzi said. She dismissed the criticism that a Labor Department rule would harm investors with small retirement accounts. “Honestly, we've looked at all the literature we can find, and we can't find any evidence of that,” Ms. Borzi said. “If you have any evidence, please share it with us," she said. "Please help us understand how we might structure our rule … so that if it's a serious problem, we can minimize that.” Lee Covington, senior vice president and general counsel at the Insured Retirement Institute, wasn't swayed by Ms. Borzi's rebuttal. “We just disagree,” said Mr. Covington, who was in the audience at the FSR event. “It's clear that studies show that middle-income investors will lose access to advice.” The worry that groups such as the IRI have is that the Labor Department rule would curtail commissions and revenue-sharing on retirement investment products. During the event, Ms. Borzi tried to allay those fears. “We are not going to prohibit commissions in the new proposal. We will propose ways you can be compensated by commission — we might call it something different," Ms. Borzi said. "We don't regulate business models," she said. "We regulate advice." The new proposal will include prohibited-transaction exemptions related to commissions and revenue sharing. It also will address investor education and rollovers from 401(k) plans to individual retirement accounts. “It's our No. 1 priority within the Department of Labor,” Ms. Borzi said. “We think it's a critically important consumer protection.”

Latest News

Judge OKs more than $90 million in settlement money for GWG investors
Judge OKs more than $90 million in settlement money for GWG investors

Mayer Brown, GWG's law firm, agreed to pay $30 million to resolve conflict of interest claims.

Fintech bytes: Orion and eMoney add new planning, investment tools for RIAs
Fintech bytes: Orion and eMoney add new planning, investment tools for RIAs

Orion adds new model portfolios and SMAs under expanded JPMorgan tie-up, while eMoney boosts its planning software capabilities.

Retirement uncertainty cuts across generations: Transamerica
Retirement uncertainty cuts across generations: Transamerica

National survey of workers exposes widespread retirement planning challenges for Gen Z, Millennials, Gen X, and Boomers.

Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future
Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future

While the choice for advisors to "die at their desks" might been wise once upon a time, higher acquisition multiples and innovations in deal structures have created more immediate M&A opportunities.

Raymond James continues recruitment run with UBS, Morgan Stanley teams
Raymond James continues recruitment run with UBS, Morgan Stanley teams

A father-son pair has joined the firm's independent arm in Utah, while a quartet of planning advisors strengthen its employee channel in Louisiana.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave