A Securities and Exchange Commission official whose job is to represent retail investors has warned the agency not to water down current investment-advice standards as it considers a rule to raise the bar for brokers.
SEC Investor Advocate Rick A. Fleming said on Tuesday that as the SEC mulls a uniform fiduciary-duty rule, parameters mandated by the Dodd-Frank financial reform law could result in a weaker standard than the one that now applies to investment advisers.
“[A]n ill-advised rule could be worse than no rule at all,” Mr. Fleming wrote in
a report to Congress. “We will fight to avoid these outcomes and to encourage rulemakings that are as strong as possible for investors.”
Advisers must act in the best interests of their clients, or as fiduciaries. Brokers must recommend investment products that are suitable, giving brokers leeway to put clients in high-fee products when lower costs ones would work.
Under Dodd-Frank, the SEC has the authority to circulate a best-interests standard for all retail investment advice. But the law also stipulates that the standard must allow for sales-based compensation, the sale of proprietary products, sales from a limited menu of products and relieve brokers from a continuing duty of care for clients.
If the SEC follows that prescription, it won't benefit investors, Mr. Fleming asserted in his report.
He argued that harmonizing adviser and broker rules could “dilute the existing standard for investment advisers” and that a “poorly designed” rule could mislead investors into think they're receiving a fiduciary-level of protection.
Promoting the fiduciary-duty rule is one of eight items on Mr. Fleming's policy agenda for fiscal 2016, which begins on Oct. 1. Tuesday's report to Congress on his office's objectives is the second he's filed since he was appointed in February 2014. It represents the first time fiduciary-duty is a priority.
ANOTHER HURDLE FOR WHITE
Mr. Fleming's stance gives SEC Chairman Mary Jo White one more person to try to assuage, as she begins work on a rule. In March, she said that
she supports a fiduciary standard but acknowledged in congressional testimony that she may not be able to persuade at least two of the five SEC members to join her.
While the SEC struggles with a fiduciary rule, the Department of Labor has
proposed a best-interests standard for brokers when they work with clients in individual retirement accounts and other retirement vehicles. The comment period ends on July 21. The agency, with backing from the White House, wants to finalize the measure before the end of the Obama administration.
Opponents of the DOL rule assert that the SEC should take the lead on establishing fiduciary duty because it is the securities regulator. But supporters of the DOL measure say that the SEC may never act.
Mr. Fleming suggested that if the SEC follows Dodd-Frank in its own rulemaking, the prohibition against continuing care would produce a rule that is weaker than current rules pertaining to retirement accounts.
