More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
Less than a month apart, the women behind the crafting of fiduciary rulemakings at the Department of Labor and the Securities and Exchange Commission made some definitive comments about their respective proposals.
In late February, SEC Chairwoman Mary Jo White set 2014 as the year the fate of a uniform fiduciary standard rulemaking for brokers and advisors would be decided by stating the agency would make a “threshold decision on whether to proceed in adopting a uniform fiduciary standard rule” for broker-dealers and investment advisors.
Once that's been agreed upon, she said, the agency would then decide whether there should be “harmonization” of BD and advisor rules.
In mid-March, Phyllis Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration, stated that moving forward in releasing EBSA's redraft of a rule to amend the definition of fiduciary under ERISA is DOL's “No. 1 priority.”
Labor Secretary Thomas Perez stated in mid-March that a redraft would be arriving “in the coming months.” DOL's regulatory agenda cites August as the arbitrary release date, but Borzi said at a Financial Services Roundtable (FSR) event in Washington held in mid-March that it could be sooner or later than that.
While a fiduciary redraft from the DOL seems to be on track, comments made by SEC Commissioner Daniel Gallagher at the FSR event signal that the SEC may not issue a proposed rule at all.
“I’m not sure a majority of the commission believes we need to use” the authority under Section 913 of Dodd-Frank, Gallagher said.
SEC: ‘Authority, Not a Mandate’
While Commissioner Gallagher noted that the SEC, like DOL, is being “deliberative” in assessing a fiduciary rulemaking, he also reiterated the point that the SEC has “the authority, but not a mandate” to issue such a proposal.
The economic analysis that the agency is currently conducting on such a fiduciary rule, he continued, “will help us to determine whether we need” to move forward.
But there's talk among industry insiders that if the economic analysis does prove strong enough to push the SEC forward in its rulemaking, Congress could step in with new legislation calling for enhanced economic analysis requirements for the SEC before it proceeds.
Washington insiders say that the commission is currently split—two commissioners want to move forward with the authority under Dodd-Frank while two are opposed and only want to enhance disclosures. White is the crucial third vote that's needed to move a proposal forward, but she has remained tight-lipped on where she stands on the issue.
Gallagher told me after his speech in late February at the SEC Speaks event that the agency “has more pressing issues to deal with” than a fiduciary rule.
Indeed, former SEC Chairman Harvey Pitt told me in an email message that he believes “the most influential factor” in determining SEC action on a fiduciary proposal “will be the other things” on the commission's agenda. “There are still a great many rules waiting to be adopted, and Mary Jo has a huge backlog of things to attend to.”
The ‘Courage to Stand Up to Wall St.?’
Ron Rhoades, president of ScholarFi Inc., a fee-only wealth advisory firm, is hoping White “has the courage to stand up to Wall Street” and isn't “just another in a long string of SEC chairpersons who have taken their marching orders from Wall Street's oligarchy.”
Said Rhoades: “If I had to place my bet, I would have to, at this time, ‘follow the money.’ Wall Street and the insurance companies are pouring many, many millions of dollars into Washington, D.C., this year to stop the DOL and the SEC from moving ahead with regulatory extension of the fiduciary standard of conduct.”
Duane Thompson, senior policy director at fi360, added that while it's hard to ignore the fact that a fiduciary rule wasn't on the SEC's list of proposed rulemakings for 2014, he's heard that those who have met with White “were impressed with her knowledge on the issue and that she ‘said all the right things,’ which suggests she is sympathetic to the need for a higher standard and wants to move forward eventually with a rule.”
Thompson said that White's track record so far places her squarely in the traditional role of former SEC chairmen in that she seems to be “working hard for consensus among the commissioners before moving ahead with a vote on a rule proposal.” He finds it difficult to predict if White would be “willing to move ahead with a fiduciary rule if the commission splits with a 4-1 or 3-2 vote,” Thompson said. “If you look at past rule challenges in court, most of them involved split votes by the commission.”
The downside that Thompson, Rhoades and other fiduciary advocates see in the agency moving ahead is a watered-down fiduciary standard as the end result.
Rhoades urged advisors to kick up their lobbying efforts.
“We’ve been involved in the fiduciary ‘debate’ for well over a decade,” Rhoades said. Wall Street's strategy, he said, is to “seek delays and wear out the pro-fiduciary advocates. Yet, now, 2014 could well be a pivotal year. If we care about these issues, this is our time to take action in some fashion—now, not a year from now.”
Meanwhile, Back at DOL …
As for the DOL's fiduciary redraft, Borzi noted during the mid-March Financial Services Roundtable event that a DOL fiduciary rule is needed because “just like the marketplace has evolved, our structures for monitoring and regulating the marketplace need to evolve as well.”
Since pulling its 2010 fiduciary draft, Borzi said the DOL has spent countless hours getting feedback on the plan, which included “some nuggets of constructive criticism, but most of the time it was just the same old thing: ‘Go away.’”
But Borzi said reissuing a redraft is “a No. 1 priority” for DOL because “it's a very important” consumer protection issue. “We need to focus like a laser beam on our clients,” she said. “There is confusion about the legal standard for people who give advice.”
There's been “a lot of talk” about how two standards—one issued by the SEC and another by DOL—“will [create] all this confusion in the marketplace,” but she stressed that “today there's confusion in the marketplace.”
Borzi questioned why the industry is “so opposed” to DOL putting out a proposal to spark debate about an issue that needs a “conversation at the national level.”
Rep. Gwen Moore, D-Wis., a member of the House Financial Services Committee, who spoke at the FSR event, said that she agreed with Borzi about the “importance of having a strong fiduciary standard” and noted her support for DOL moving ahead on re-releasing what she called “a discussion template,” as the redrafting has “taken into consideration” the comments made earlier.
However, Moore said she still had concerns about how the proposal will be reworked to address the distinction between investment education and investment advice—an area Borzi said will be updated.
“I’m concerned that an open-ended definition of who's a fiduciary … would provide that any information could lead to liability on the part of advisors and that this would have a chilling impact on providing education,” Moore said.
Borzi stated in her comments that DOL has “tried to be more specific [in the reproposal] about the difference between education and advice; both are important, and there are different standards that apply.” Education, she argued, “is not fiduciary in nature. Where you cross the line is a harder question, but that's what we’ve tried to answer.”
Rep. Blaine Luetkemeyer, R-Mo., who also sits on the House Financial Services Committee and was on hand at the FSR event, noted that he was thankful that DOL pulled its initial rule proposal and warned of the rulemaking's “unintended consequences.” He noted that he wasn't clear on “the overabundance” of problems the DOL's redraft is trying to solve. “I haven't seen this evidence yet,” he said. “Are there laws in place,” he wondered, that “if enforced properly, will solve the problem?”
But Dallas Salisbury of EBRI applauded DOL for its work on the fiduciary redraft. “There clearly needs to be some change in the marketplace to rebuild trust.”