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Regulation and Compliance > Federal Regulation > SEC

SEC's White Supports Fiduciary Rule for Brokers, Third-Party Audits

By Melanie Waddell

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While many in the industry are applauding Securities and Exchange Commission Chairwoman Mary Jo White’s recent declaration that she will push to ensure the agency extends a fiduciary rule for brokers, concerns remain that such a rule will be a long time in the making—and may not even happen at all.

“We’ve been here before,” Barbara Roper, director of investor protection for the Consumer Federation of America, told Investment Advisor, recalling former SEC Chairwoman Mary Schapiro’s “similar commitment” to ensuring in 2009 that the securities regulator would indeed move forward with a fiduciary rule. But like White, Schapiro faced a polarized commission and wasn’t able to secure the three votes needed to pass such a rule.

White conceded at a late March hearing held by the House Financial Services Committee that the agency is at the “beginning” of its fiduciary rule process, and that such a rule is “still a ‘whether’ question; I am one of five votes on the commission.” However, she said that the release of the Department of Labor’s redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act will likely “proceed.”

White said in mid-March during a question-and-answer session with Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, at SIFMA’s Legal and Compliance Seminar in Phoenix, that her personal view “is that the SEC should act under Section 913 of Dodd-Frank to implement a uniform fiduciary duty for broker-dealers and investment advisors” where the standard is to act in the best interest of clients when giving advice to retail investors.

Said White: “That comes right out of Dodd-Frank.”

White said that such a rule should be “codified, principles-based and rooted in the current fiduciary standard for investment advisors,” and that the agency should also move forward on third-party exams for advisors.

But CFA’s Roper said that the “real question” in seeing a fiduciary rule through to fruition will be whether “on a polarized commission” White can find the three votes needed to pass a “strong, pro-investor rule and whether she can find a way to do that under the auspices of Section 913.”

Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said at the SIFMA event that he’s confident White can wrestle a uniform fiduciary rulemaking to a resolution. “Nothing hard is easy; nothing worth doing is easy,” Ketchum said during a question-and-answer session with Ira Hammerman, SIFMA’s executive vice president and general counsel. Ketchum noted his “tremendous respect” for the “range of concerns” expressed by some SEC commissioners regarding a fiduciary rule for brokers, but said he has “great confidence” in White being able to move the rulemaking forward. “I’m confident that each of the commissioners recognizes the importance of the SEC playing a central role in defining a best interest of the customer standard for the industry.”

Ketchum also noted his preference for the SEC to set a single, consistent fiduciary standard that emanates from the SEC “across all vehicles that exist for the individual investor.”

Roper added that White’s strong support for a fiduciary rulemaking “is an important step forward,” and that while getting to a rule is “possible,” it will also be challenging. She said the Consumer Federation looks forward to working with White, commission staff and the other commissioners “to bring that about.”

White acknowledged at the SIFMA event the complexities and challenges that come with such a rulemaking, including:

  1. How to define a standard

  2. What’s required under that standard

  3. How to ensure compliance and enforcement of that standard

White said that her “view going in” is that such a rulemaking should be a “principles-based standard rooted in the current fiduciary standard for investment advisors.” She acknowledged there may be many issues with doing so, but said the SEC must give “clear guidance” on how such a rulemaking would apply and what it would include.

Further, she said third-party exams “should be part of this undertaking,” adding that the agency would need to determine “who should do” the exams and “what are the criteria” for the exams.

White said that her “next steps” would be to have “in-depth” discussions with the SEC commissioners “regarding all aspects of this” as the SEC staff “proceeds to develop a recommendation for a uniform fiduciary duty and third-party program.” White stressed that third-party exams would not replace advisor exams performed by the SEC’s Office of Compliance Inspections and Examinations.

“There will be lots of questions,” White said. “It’s not an easy road; it’s not a quick road.”

Regarding the Department of Labor’s redraft of its rule to amend the definition of fiduciary under ERISA—which will likely be proposed by DOL in spring or early summer—White said that DOL is addressing very important responsibilities in its mandate for retirement accounts, adding that SEC staff provided “extensive technical support to DOL,” including the impact on investors of potential changes to the definition of fiduciary under ERISA.

The SEC and DOL “have separate mandates,” she said. “At the end of the day we have to do what we think is right under our mandates.”

Dennis Kelleher, president and CEO of Better Markets, applauded White’s public stance in her remarks at the SIFMA event that the SEC and DOL “have different statutes, missions and jurisdictions, and that it is important for both agencies to act on their separate mandates.”

Neither the SEC nor DOL “should be subordinated to the other,” Kelleher said, arguing that DOL, “after many years of broad and deep consultation and deliberation […], is very far along in satisfying its independent duty to protect American’s tax-advantaged retirement savings by closing loopholes” in the 40-year-old ERISA.

The SEC, he said, “is many years behind the DOL” in considering a fiduciary standard, consulting with all interested parties and “getting to the point where it might be appropriate to even propose a rule.”

Regarding third-party audits, White cited at the SIFMA event the lack of adequate funding that the SEC has been able to secure from Congress in order to boost the number of investment advisor exams it conducts, which is why the commission should institute third-party compliance exams for advisors. However, she said that the SEC would continue to press Congress for more funding for the agency.

Neil Simon, vice president for government relations at the Investment Adviser Association, said that the IAA is actively considering various concepts to “enhance the SEC’s oversight of the advisory profession, including possible roles for third parties.” However, IAA remains concerned about the third-party examiner concept suggested by SEC Commissioner Daniel Gallagher “due to unanswered questions, including the standards, scope and frequency of any third-party reviews; the qualification process and oversight for third parties; and the cost to advisors.”

Roper agreed that third-party exams “are fraught with problems,” such as “How independent are they? How expert are they? How much does adequate SEC oversight of that exam system cost, so how much does it actually save?”

However, she concluded that the SEC “needs to do something to improve” its oversight of investment advisors, and that “the current leaders in Congress clearly aren’t prepared to fund the agency at the necessary level.”

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