New Year, New Fiduciary Rule?

Section 913 creates a “fairly complicated roadmap” the SEC must follow in crafting a fiduciary standard, Tittsworth adds. For example, “it gives the SEC explicit authority to issue rules that would apply the same standard of conduct that investment advisors have. But it also states that the receipt of commissions and sale of proprietary products will not, in and of themselves, be a violation of that standard. And it would apply when brokers are providing “personalized investment advice about securities to a retail customer.”

Warns Tittsworth: “The SEC must take into account each and every word of Section 913 as it considers crafting a rule.” The agency must be “very mindful of potential legal challenges that may result, including providing a robust cost-benefit analysis that would pass judicial scrutiny. If the Commission proposes a rule, it will be subject to the Administrative Procedures Act process that allows all interested parties to comment.”

Barbara Roper, director of investor protection for the Consumer Federation of America (CFA), said at a recent CFA conference that she believed the SEC was “paralyzed” in moving forward on a fiduciary rule by a small portion of the broker-dealer community who she said are dependent on variable annuity sales. That group, she suggested, would likely challenge a fiduciary rule proposal in the courts.

While she said there is broad consensus that this fiduciary rule should move forward, Roper also lamented that “it seems almost impossible to make progress. We hope by sometime next year we’ll see something, but don’t bet the farm.”

Roper added that another stumbling block for the SEC is pressure from Capitol Hill on the agency to perform a more robust economic analysis on the rule.

Still, other industry executives are “encouraged” by Schapiro’s comments that a fiduciary rule will be business model neutral. Dale Brown, president and CEO of the Financial Services Institute says that FSI “has been calling for a uniform fiduciary standard since the beginning of the regulatory reform debate” and that FSI is still working “to ensure the proposal creates a new uniform fiduciary standard while maintaining client choice and client access to affordable advice.” With Schapiro’s comments, “the SEC is showing a real willingness to understand our industry and our clients’ needs, which is refreshing.”

Dan Barry, the Financial Planning Association’s managing director of government relations, said Schapiro’s reported comments “are consistent with the language in Dodd-Frank and with what has been expected,” preserving proprietary products and commissions. What will be important, he said, is setting up rules that allow for proprietary products and commissions while “making sure that investors are getting advice that is in their best interest.”

The National Association of Insurance and Financial Advisors (NAIFA) says that a new fiduciary standard of care rule “should respect the business differences between investment advisors and broker-dealers.” On average, NAIFA says that most of its members serve investors with annual household incomes of less than $100,000. “Therefore our fundamental concern is that the potential additional costs and increased potential for liability of applying a ‘one-size-fits-all’ fiduciary standard of care to the broker-dealer business model could result in middle market investors having less access to affordable financial services that are currently being delivered by our members.”

Whatever form the fiduciary rule proposal takes, as Tittsworth notes, like the 3,500 comment letters that the SEC received when it was drafting the Section 913 study, “there will be no shortage of opinions about every aspect” of the SEC’s rulemaking.