On Wednesday the Securities and Exchange Commission unveils its own version of a Dodd-Frank mandated standard for investment advisors and broker-dealers, and the effort may make it even more difficult for the Department of Labor’s embattled fiduciary standard rule to go into effect.
The DOL’s fiduciary rule governing investment advice to retirees, passed in 2016, was struck down entirely by a federal appeals court in a 2-1 decision in mid-March. The DOL’s rule, partially implemented as of June 9, 2017, was already on hold until July 1, 2019, pending an economic and legal analysis of the likely impact of the rule required by a Trump administration memorandum.
The DOL fiduciary rule said brokers can no longer earn commissions unless they agree to a best interests contract with clients. That means the advisor must give advice that is in the “best interests” of the client, can only earn “reasonable compensation”, and must providing appropriate disclosure and transparency about the products and compensation involved, according to a post by financial planner commentator Michael Kitces on his blog.
The DOL’s rule had already, “spawned significant market consequences, including the withdrawal of several major companies, including MetLife
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, AIG
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and Merrill Lynch
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from some segments of the brokerage and retirement investor market. Companies like Edward Jones and State Farm have limited the investment products that can be sold to retirement investors,” the court said in its decision.
The SEC, on the other hand, never used the word “fiduciary” in a meeting notice describing the new and amended rules it will propose on Wednesday. The SEC version would cover a much broader group than the Labor Department, one that includes registered investment advisors, broker-dealers, and “associated persons” of broker-dealers who make recommendations to a retail customer on any securities transaction or investment strategy involving securities.
The SEC’s proposals are also expected to include requirements for new disclosures for all retail customers that explain the relationship between the advisor and broker. The SEC has specific legal authority to make rules governing the conduct of investment advisors and broker-dealers.
Assuming the SEC commissioners approve the proposal, it will begin a public comment period expected to generate thousands of letters for and against. Analysts KBW write that the SEC’s proposal could be a positive development for the financial services industry because it would “create a roadmap” for how the DOL could revise its 2016 fiduciary rule to “reduce a headline risk that has plagued the industry for years.”
One skeptic sees the SEC’s decision to finally put out a proposal now, after the DOL’s contentious proposal was struck down by a court of almost last resort, as a potentially effective “catch and kill” strategy.
Nicholas Gravante, a top litigator and member of the executive committee of law firm Boies Schiller and Flexner, told MarketWatch, “It’s surprising that the SEC would propose rules that cover more people, require more disclosures and are potentially more onerous than DOL’s after all of the objections to those rules that only cover retirement advisors. The SEC’s proposal may slow down, or perhaps derail, any future DOL rules,” said Gravante.
In February the SEC’s chairman Jay Clayton told conference attendees in Washington that the SEC’s effort was a top priority for him. “I don’t think it’s any secret that we’re going to make a big effort to try to bring clarity and harmony to the investment adviser, broker-dealer standard of conduct regulation — something that’s important to me,” Clayton said.
In March, Clayton told attendees at the Orlando conference of the Securities Industry and Financial Markets Association, a trade association and one of the plaintiffs that sued the DOL to strike down its rule, that retail customers interactions with financial advisors are covered by “at least five” regulators.
“I’ve convinced myself that we need to do something to try and bring that five, six, seven number down,” said Clayton.
Gravante expects that the SEC’s proposal will hit all the “mom and apple” pie points about investor protection especially of elderly investors or those who are less financially sophisticated, given the SEC’s recent emphasis on protecting retail investors from high fees and Ponzi schemers.
“It’s very easy to propose rules with policy objectives that no one can disagree with,” Gravante told MarketWatch. “But if the proposed rules are very broad and prescriptive, don’t be surprised when, after several months, the comments and additional analysis from industry experts highlight the difficulty of implementing rules that will be too expensive and too onerous for the retail investors the SEC says it wants to protect.”
Source : MTV
