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SEC, DOL approach fiduciary standard from different angles

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It’s a marathon, not a sprint.

While occasionally it has seemed that the Securities and Exchange Commission (SEC) and the Department of Labor (DOL) have been racing to draft fiduciary rules, the pace is more turtle than rabbit. Here’s an overview of where things stand now regarding developments in the universal fiduciary standard situation.

On March 1, roughly three years after the Dodd-Frank Act authorized (but did not require) the SEC to impose a fiduciary standard on broker-dealers, the SEC issued a sweeping, long-anticipated (and long-winded) request to the financial services industry and the public for comment and data. The agency asked for their help in determining changes to standards of conduct that apply to certain types of financial advisors.

The SEC is currently in the midst of the 120-day process of collecting responses, which ends on July 5. SEC Chairwoman Mary Jo White has said no decision will be made to move forward with the SEC’s rulemaking until the agency reviews the comments and data, which will likely take months.

Meanwhile, the DOL is working on a revised proposal to amend the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA), which would establish new rules for the sale of investment products to beneficiaries of company-sponsored retirement plans and IRAs.

There is great concern the DOL’s re-proposed rule could eliminate the ability to have a commission-based model for ERISA accounts and create substantial operational challenges for brokers who may have to operate under conflicting rules from two different agencies (DOL and SEC) for one client. A DOL rule could contradict provisions of Dodd-Frank specifying that receipt of commissions and sales of proprietary products are not intrinsically fiduciary violations. The DOL’s revised proposal was rumored to be unveiled in July, but it’s now unlikely to be made public until this fall at the earliest.

Then, in mid-May, Congress released a discussion draft of a bill that would require the SEC and DOL to collaborate on their fiduciary rules. It would amend Section 913 of the Dodd-Frank Act by:

  • Mandating that the SEC coordinate with other federal agencies before issuing any broker-dealer fiduciary rule;
  • Requiring the SEC, before issuing any rule, to find that the new rule will remedy investor confusion; and
  • Requiring the SEC, before issuing any final rule, to find that the status quo demonstrates economic harm to investors and that the new rule will remedy this economic harm.

SEC Chair White told the House Financial Services Capital Markets Subcommittee, which released the discussion draft, that while the SEC and DOL staffs have been in frequent contact regarding their fiduciary rules, she stressed the two are different agencies that will ultimately make their own independent decisions.

Meanwhile, industry organizations including the National Association of Insurance and Financial Advisors (NAIFA) and the Association for Advanced Life Underwriting (AALU) are busy crafting their comments in response to the SEC’s request for comment release, which came in the form of a 72-page document with a variety of assumptions.

In the release’s introduction, the SEC states that it intends to use the comments and data it receives to inform its consideration of alternative standards of conduct for broker-dealers and investment advisors when providing personalized investment advice about securities to retail customers. It also will use this information to inform its consideration of potential harmonization of certain other aspects of the regulation of broker-dealers and investment advisors.

The release background states that the identification of particular assumptions does not suggest the SEC’s policy view or the ultimate direction of any proposed action by the SEC. It invites comment based on other assumptions chosen by commenters, as well as comparisons between analyses made under assumptions chosen by commenters and analyses made under those assumptions chosen by the SEC.

The Institute for the Fiduciary Standard, a nonprofit think tank whose single purpose is to promote the vital importance of the fiduciary standard in investment and financial advice, is worried the SEC’s request for input suggests it will adopt rules that will “water down” the broad fiduciary standard applicable to investment advisors under the Investment Advisers Act of 1940, under which RIAs currently function.

The Institute for a Fiduciary Standard, in an April 16 condensed version of its white paper about the March 1 SEC release, said if the explicit assumptions in the release were adopted in rulemaking on a uniform fiduciary standard, fiduciary duties would be sharply restricted, effectively removed when brokers and advisors render investment advice. “The era of FINO — Fiduciary In Name Only — would have arrived,” the Institute’s release stated. “Individually, each of these assumptions — restricting the broad concept of advice implicit in the Advisers Act, permitting the waiver of fiduciary duties, framing disclosure as the optimum measure of loyalty, and omitting the strongest disclosure requirement (of informed consent) — could materially undermine the stringency of a uniform fiduciary standard as compared to the Advisers Act fiduciary standard.”

NAIFA preparing comments

Gary Sanders, NAIFA vice president of securities and state government relations, told Life Insurance Selling in mid-May that NAIFA has not yet submitted its comments to the SEC. “The SEC request is very detailed, has many parts and asks a number of very specific questions about registered reps, registered investment advisors and their clients,” he said. “NAIFA wants to be as responsive to the SEC as possible, and is drawing on member surveys, published studies and other resources to answer the questions as thoroughly as we are able.”

NAIFA commissioned LIMRA to survey its members and consumers in 2010 on a variety of topics in connection with this issue, and a key finding from that survey indicated that if a universal fiduciary standard of care was imposed on investment advisors and broker-dealers in connection with their providing retail investment advice, there was a risk that mid-market investors could lose access to needed products and services.

“The survey found that consumers with household incomes in that middle-market range represented a core client base of NAIFA members,” Sanders said. “Our comments will address those concerns and focus on the value that registered representatives of broker-dealers provide to retail customers, and emphasize that any SEC fiduciary rule should not do anything to reduce services or increase costs for this group of people who have a crucial need for investment products and advice.”

After the SEC sorts through all the comments and data, Sanders said it will likely take some time for the agency to produce a meaningful cost-benefit analysis of the potential impact of a possible standard of care rule. After that process is completed, if the SEC decides to move forward with the development of a rule, the next step could be for the commission to release for comment the actual language of a proposed standard of care rule, which will then require a certain time period to allow for the public to submit comments on the proposed rule.

“If the SEC decides to move forward, we’re confident the commission will take the time they need to develop a standard-of-care rule that’s in the best interests of all investors, including those in the middle market, and that acknowledges and respects the existence of the different business models which currently provide services and advice to investors,” Sanders said.

Sanders also stressed it is important to remember that a life insurance producer who only holds an insurance license and does not market investment or securities products will not be directly impacted by SEC action in this area. “We always encourage NAIFA members to be politically aware and active where necessary, because laws and regulations can have a major impact on their businesses and their clients,” Sanders said. “If appropriate, NAIFA will ask its members to let the SEC know their views on this issue.”

On May 20, NAIFA, in cooperation with The American College for Financial Services, did ask for their views by sending out a link to a survey via email.

Sanders closed out the interview with Life Insurance Selling by reiterating that SEC action will primarily impact persons who are registered representatives of broker-dealers or who are dually licensed as registered reps and investment advisor representatives. “Everyone should also know that neither the SEC nor the DOL has taken any final action on this issue and that neither has issued a currently pending proposed rule,” Sanders said. “Further, the SEC has yet to decide if it definitely plans to proceed with a rule on this matter.”

AALU concerns

As of early May, AALU had also not submitted its comments and data to the SEC. In an April 29 interview with Warren Hersch of Life Insurance Selling’s sister publication, National Underwriter Life and Health, AALU Regulatory Reform Committee Chair Ken Ehinger said the issue is not simply a question of extending the fiduciary standard that now governs registered investment advisors to the broker-dealers currently governed by the suitability standard.

“They’re really different business models, and the roles that you play for a client are different,” Ehinger said. “On the insurance side, it’s almost more of a question of the concerns about after-the-fact judgments about what was supposedly the right thing to be done. How do you know whether it is the right insurance product or not if you can’t predict a person’s lifespan? You can’t really predict what the market’s going to do, up or down. There are really decisions that can’t really be applied after the fact.”

If the SEC were simply to extend the fiduciary standard that now applies to RIAs to broker-dealers, Ehinger said a variety of things could happen, including some unintended consequences. There would be higher cost for consumers because of associated compliance costs and the legal liability/exposure related to the cost of E&O insurance for producers.

“The other thing to keep in mind is that the SEC — they’re really only addressing variable life insurance products when they’re talking about life insurance,” Ehinger said. “And if the legal liability is so significantly different, our fear would be that some would give up their registration and not sell variable products, which [would] cut down on consumer choice.”

Another concern, Ehinger said, was the fiduciary standard issue coming about because the SEC was concerned about the confusion of consumers regarding what roles advisors are playing. “If the concern is confusion, changing the legal application of how you interact doesn’t seem to be the answer to us. The answer to us would really be more disclosure of roles.”

Whatever rules end up being promulgated, Ehinger said the AALU wants to make sure the agency does its due diligence first. He says it needs to clearly state the problem it’s trying to resolve and identify the costs associated with implementing a “fix” to that the problem. Are there real benefits, particularly for the consumers everyone is trying to protect?

What’s next

Expect to see the DOL publish a revised rule for comment this fall, which will set out circumstances under which a fiduciary relationship arises based on the provision of investment advice. Expect the SEC to publish a proposed standard-of-care rule for comment either late this year or in early 2014.

Expect plenty of comments to follow, which could result in re-proposed rules. Whether any eventual SEC and DOL rules will contradict each other or work in harmony remains to be seen, but it doesn’t look like they’ll be on the same page anytime soon.

Editor’s Note: Warren Hersch contributed to this article.

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