SEC's Gallagher: Fiduciary Rule Needs More Study; Failure to Supervise Should be Focus

As Securities and Exchange Commission Chairwoman Mary Schapiro was stating last week her belief that the agency could issue a proposed rule to put brokers under a fiduciary mandate next year, the newest SEC commissioner, Daniel Gallagher, declared that the SEC must first determine if such a rule is “necessary,” stating the agency should focus on issuing guidance regarding failure to supervise.

During an Oct. 23 speech before the National Society of Compliance Professionals, Gallagher, a Republican, said that “it is important to note that the commission is not compelled to promulgate [fiduciary] rules pursuant to Section 913” of Dodd-Frank. Congress “granted the Commission authority to write [such fiduciary] rules, but left it to our discretion.”

Therefore, he continued, “any rulemaking pursuant to Section 913 must, then, be supported by commission findings that such rules are necessary, as well as a detailed understanding and analysis of the economic consequences of such rules.”

Noting that investment advisors and brokers are held to different standards under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934, Gallagher pointed to the one area where he said the Exchange Act and Advisers Act “are in accord”–their treatment of failure to supervise liability for compliance and legal personnel.

Gallagher first talked about the need for the SEC to create “clearer guidance” of what makes a legal or compliance officer a supervisor back in February during the SEC Speaks seminar. He said during that speech that the issue remains “disturbingly murky,” and signaled that he’d like the securities regulator to develop “clearer guidance” on the issue.

Gallagher at the time said that the “old issue” of “failure to supervise” has become very relevant again.