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Regulation and Compliance > Federal Regulation > SEC

SEC’s Gallagher: 4 Things White House Fiduciary Memo Got Wrong

By Melanie Waddell

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The Department of Labor’s rule to amend the definition of fiduciary on retirement accounts is a “runaway train,” and the recent White House memo supporting release of the DOL redraft is “thinly veiled propaganda designed to generate support for a widely unpopular rulemaking,” SEC Commissioner Daniel Gallagher said Friday.

Speaking at the Practising Law Institute’s SEC Speaks conference in Washington, Gallagher argued that the DOL fiduciary rule is based on “the premise that an entire SEC-regulated industry is plagued by conflicts of interest,” a premise “that, despite the white-hot intensity with which it is posited by its proponents, has nowhere been proven.”

Said Gallagher: “I have not seen the [DOL's] reproposal. And given the SEC’s comprehensive oversight authority with respect to the investment advisors and broker-dealers who would be impacted by it, you might find that curious.”

SEC Chairwoman Mary Jo White told reporters after her early Friday morning remarks at the event that the SEC is providing “technical assistance” to the DOL regarding its rulemaking. White said she would be providing insight into her position regarding a fiduciary rulemaking by the SEC in the “short term.”

However, Gallagher stated in his remarks that “despite all the work the SEC staff has undertaken on” the subject of putting brokers under a fiduciary mandate, “not to mention the Commission’s decades of history in regulating broker-dealers and investment advisors and overseeing their disclosures relating to conflicts of interest, the DOL has not formally engaged the Commissioners, at least not this Commissioner, on its fiduciary rulemaking process and the impact it may have on investors.”

Despite public reports of “close coordination between the DOL and SEC staff,” regarding the fiduciary rules, he continued, “I believe this coordination has been nothing more than a ‘check the box’ exercise by the DOL designed to legitimize the runaway train that is their fiduciary rulemaking.”

Gallagher argued that if DOL “sticks with its approach to ban or effectively ban conflicts, entire categories of products and services that are now available to investors could disappear.”

He challenged the White House memo’s assertions in four areas.

First, he said the memo’s statement that “consumer protections for investment advice in the retail and small plan markets are inadequate,” is not accompanied “by any analysis or study of the current protections investors receive from the regulatory oversight of brokers and investment advisors by the SEC and the SROs,” and makes no mention of the SEC or FINRA. 

Second, the memo’s statement that “the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year,” fails to point out that there are SEC and SRO rules “directly addressing the so-called perverse incentives referenced to in the memo,” such as rules that require “clear disclosure to investors about payments and fees — including incentive fees — prohibit the use of manipulative, deceptive or fraudulent practices, and require significant diligence about investors and their needs.”

Third, as to the memo’s claim that “the current regulatory environment allows fund sponsors and advisory service firms to create incentives for their advisors to recommend excessive churning . . . of retirement assets and to steer savers into higher cost products with financial payoffs for the advisor,” Gallagher stated that SEC rules “expressly prohibit brokers from churning client accounts, and the SEC and SROs have sophisticated tools designed to monitor for such activity.” Fourth, as to the memo’s claim that “academic research has clearly established that conflicts of interest affect financial advisors’ behavior and that advisors often act opportunistically to the detriment of their clients because of payments they receive from product providers,” this statement, “like the others, ignores the existence of the comprehensive oversight and disclosure regime specifically designed to address these underlying conflicts of interest.”

DOL is expected to file its fiduciary redraft at the Office of Management and Budget for a 90-day review any day now. DOL put the first interation of its fiduciary rule out in 2010, but after fierce opposition, withdrew the proposal in September 2011.

As to the fiduciaries that the SEC’s regulates, while the agency’s oversight of investment professionals is not “perfect,” Gallagher said he believes “that the model is not fundamentally broken.”

Stated Gallagher: “I am greatly concerned that much of the debate on these issues seems to assume that the ‘fiduciary duty’ is a sort of talismanic protection that can overcome any competing regulatory concerns. All too often, this is the approach taken by those who simply do not know how the fiduciary duty works in practice. They do not understand or choose to ignore the limitations of the fiduciary duty,” acknowledging that “even the SEC has much to learn about the real-world application of the fiduciary duty — an area that receives far less attention than it should.”

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