Will the SEC Create Two Kinds of Fiduciaries?

While attending the Schwab IMPACT conference in mid-November, a comment from retirement industry expert Brian Graff about how Dodd-Frank says the Securities and Exchange Commission must write its fiduciary rule for brokers — if the agency chooses to do so —  caught my attention.

Graff, a Capitol Hill veteran who’s the executive director of the American Society of Pension Professionals and Actuaries, said to advisors in attendance that if the agency follows Dodd-Frank’s directive it may end up creating “two kinds” of fiduciaries.

Dodd-Frank “explicitly” says that if the SEC develops a uniform fiduciary standard the agency “cannot preclude the advisor from getting commission-based compensation and cannot require the advisor to monitor investments,” Graff told the attendees.

Now, I’ve been covering the SEC’s progress on whether or not it would craft such a fiduciary rule since Dodd-Frank was passed into law in 2010, and while what Graff said about commissions and ongoing monitoring of investments wasn’t something I hadn’t heard before, it was the first time I’d heard an industry official use the term “two kinds” of fiduciaries.

I asked a few more industry experts to parse out the “two kinds” of fiduciaries concept. Here’s what they said.

David Tittsworth, executive editor of the Investment Adviser Association in Washington, told me that two fiduciary standards could be a “possible” outcome.

Section 913 of Dodd-Frank states that any rule promulgated by the SEC “cannot make the receipt of commissions, in and of itself, a violation of the fiduciary duty; and that such a rule cannot make the sale of proprietary products, in and of itself, a violation of the fiduciary duty; and that Section 913 does not require the ongoing monitoring of investments,” Tittsworth explained.

While the law “does not necessarily mean that there will be two different fiduciary standards — the existing fiduciary standard under the Advisers Act and a fiduciary standard for brokers that provide investment advice to retail customers,” that result is “possible.”

Jeff Brown, senior vice president of Legislative and Regulatory Affairs for Schwab, told me during an interview at the Schwab event that he believes that’s exactly what the SEC will do. Under the SEC’s fiduciary rule proposal, which Brown said we’ll likely see sometime next year, “you’ll have advisors operating under the Advisers Act standard and state common law, and then you will have BDs subject to a fiduciary standard at the moment they give advice” about securities to retail customers — what he called a “transactional” fiduciary standard.

Duane Thompson, senior policy analyst at fi360, said that while he doesn’t agree with Graff’s “two kinds” of fiduciaries characterization, he does agree that there “could be differences for another reason — and that is if the SEC does not permit common law to apply to brokers under a uniform fiduciary duty as the same case law applies currently to investment advisors.” In this regard, he said, “the brokerage industry is currently lobbying the SEC to throw out the fiduciary baby with the bath water.”