What's Next for the Fiduciary Standard?

While the industry awaits a decision by the SEC on whether it will move forward with a uniform fiduciary rule for brokers and advisors, fiduciary advocates will engage this month in a debate about the importance of the two fiduciary rulemakings being considered by the SEC and the Department of Labor, as well as what the industry’s role should be in shaping fiduciary standards.

As Fiduciary September approached—and with only three months remaining until SEC Chairwoman Mary Jo White’s self-imposed deadline for the agency to make by year-end a “threshold decision” on whether and how to move forward on a fiduciary rulemaking—I reached out to top fiduciary thinkers to get their views on where the commission may be headed.

The Institute for the Fiduciary Standard, which christened this month as Fiduciary September, is holding a series of fiduciary-related events throughout the month, while TD Ameritrade Institutional will hold its second Fiduciary Leadership Summit in Washington Sept. 15-17.

Skip Schweiss, president of TD Ameritrade Trust Co. and managing director of advisor advocacy and industry affairs at TD Ameritrade Institutional, said there’s “a small but growing body of thinking in the advisor space that if regulators cannot or will not move ahead with rulemaking on a fiduciary standard, then maybe the profession should.”

David Tittsworth, CEO of the Investment Adviser Association in Washington, told me that the fiduciary rulemaking under Section 913 of the Dodd-Frank Act “certainly appears to be stalled,” with the two Republican commissioners, Daniel Gallagher and Michael Piwowar, signaling that “the costs of a potential rule outweigh the benefits.” At best, Tittsworth said, “it appears that the only way to find three votes” to move a fiduciary rule forward is among the commission’s three Democrats: White, along with Commissioners Luis Aguilar and Kara Stein.

Don Trone, president of the Leadership Center for Investment Stewards and CEO of 3ethos, said that while a fiduciary rulemaking won’t surface this year, “no one at the SEC is going to be foolish enough to say the fiduciary debate is over.”

Fiduciary duty will “always” be an issue for the commission to consider, Trone added, but “the role of the regulator is to define the minimum standard of care required.” The SEC’s “idea of minimum standard” when it comes to writing a rule to put brokers under a fiduciary standard “won’t come close to what the rest of us view” as the minimum standard.

Barbara Roper, director of investor protection at the Consumer Federation of America, agreed that while the SEC’s “role is to define regulatory standards” and that the industry “is free to define higher, voluntary professional standards,” a minimum standard by the SEC “shouldn’t imply that it can be a weak or minimalist standard.”

Section 913 of Dodd-Frank “authorizes the SEC to adopt a rule regarding the standard of conduct for brokers in certain situations—and that such standard ‘shall be the same as the standard of conduct applicable to an investment advisor under section 211 of the Investment Advisers Act,’” Tittsworth added.

“The industry has always been free to engage in practices that are arguably higher standards, but the question to me is: What is the rule of law?”

While admitting that Section 913 of Dodd-Frank “is a complicated provision,” Tittsworth said it’s also clear that Dodd-Frank “authorizes the SEC to adopt a standard that is the same as the Advisers Act fiduciary standard.”

What Troubles RIAs

Many advisors have voiced concern that the SEC will come out with a fiduciary standard for brokers that is a watered-down version of the Advisers Act standard, one that could “tilt toward being disclosure-based as opposed to a true fiduciary standard of care for consumers,” said Schweiss.

Trone surmised that a disclosure-based rule will be the likely outcome. As far as the SEC is concerned, he said, a fiduciary standard will be satisfied “when all conflicts of interest are disclosed.”

After stating earlier this year that the SEC would make a “threshold decision” in 2014 on whether to proceed with a fiduciary rulemaking, SEC Chairwoman White directed SEC staff to come up with a fiduciary rulemaking “options” list.