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Regulation and Compliance > Federal Regulation > DOL

For Once, Two Certainties in D.C.: New SEC Commissioners, DOL Fiduciary Rule

By Melanie Waddell

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The New Year — yes, I’m talking about 2016 already — will bring with it two certainties: A final fiduciary rule will be unveiled by the Department of Labor and new commissioners will be installed at the Securities and Exchange Commission.

With the August hearings regarding DOL’s redraft of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act behind us, fiduciary advocates are gearing up this month to once again put the “F” word center stage as they usher in what the Institute for the Fiduciary Standard dubs “Fiduciary September.”

From “the ‘Merrill Lynch Rule’ and Dodd-Frank to the DOL proposal and the SEC’s affirming that disclosing conflicts is fiduciary ‘loyalty,’ 2015 culminates a 15-year battle for the soul of fiduciary advice in federal regulation,” Knut Rostad, founder of the Institute, told me in a mid-August email from Oslo, Norway.

The third year of the Fiduciary September program, which will be formally announced Sept. 1, aims to highlight the importance of fiduciary principles in preserving investor trust and confidence in the capital markets, according to Rostad.

TD Ameritrade Institutional is the exclusive sponsor of this year’s Fiduciary September. Skip Schweiss, TDAI’s managing director of advisor advocacy and industry affairs, told me in an email message that this year’s event is “more important than ever,” as the industry braces for the pending DOL fiduciary rule, renamed the Conflicts of Interest rule. What’s more, he noted, more court cases are being brought in the retirement arena, “reinforcing fiduciary duties of care and ongoing diligence, especially as it relates to investment product selection and fees.”

Public remarks by SEC Chairwoman Mary Jo White throughout this year have continued to signal the agency is moving — albeit slowly — toward unveiling its own uniform fiduciary rule for brokers and advisors. Should such a rule come to pass (not likely this year), noted Schweiss, it “could really shake the world” of advisors and brokers.

Barbara Roper, director of investor protection for the Consumer Federation of America, voiced her doubts at the recent spate of DOL hearings that the SEC would actually pull it off. “If the SEC were eventually to get around to adopting a rule — something that is far from guaranteed; at CFA we’ve been waiting for a little over 15 years — it would by definition be limited to recommendations regarding securities,” not retirement accounts, Roper told the DOL officials.

Indeed, Former SEC Chairman Arthur Levitt agreed that the agency is having a tough time reaching a consensus on how to move forward with its own fiduciary rulemaking. He said in an Aug. 19 interview with the Investment Adviser Association to commemorate the 75th anniversary of the Investment Advisers Act, which occurred on Aug. 22, that because the SEC commissioners are so “divided philosophically” on whether and how to move ahead on a fiduciary rulemaking, the agency will be “locked in a conflict on this issue for a long, long time.” The solution: “We should try to move ahead on the standard put forth by the Department of Labor,” Levitt said. “Is [the DOL proposal] perfect in terms of wording and content? Probably not. But I don’t know that there’s any rule that is ever perfect or that never has unintended consequences.”

Added Levitt: “We have long passed the time that we can afford to have side by side, advisors with one set of responsibilities and brokers with a much easier set of responsibilities and standards.”

David Tittsworth, the former president and CEO of the Investment Adviser Association who’s now with the law firm Ropes & Gray in Washington, said that while White has maintained in her public remarks that a fiduciary rulemaking under Section 913 of Dodd-Frank is a “high priority” for her, it looks as though other rulemakings from the Division of Investment Management are taking precedence. Those rules include the agency asking for information from advisors on their Forms ADV as well as anticipated proposals on liquidity and derivatives management by mutual funds and ETFs.

SMAs, Social Media and New Commissioners

“These rulemakings are being driven by the commission’s desire to deter U.S. and international banking regulators from asserting jurisdiction over investment management firms and activities — one of the few issues where there is unanimity among the commissioners,” Tittsworth said.

The IAA told the SEC in its mid-August comment letter regarding the agency’s proposed new requirements for Form ADV to focus a “particularly keen eye” on the disproportionate costs that would be imposed on smaller advisors if the agency moves ahead with its plan to require advisors to provide more data on separately managed accounts on their Form ADV. In addition to more SMA information, the SEC also wants advisors’ Forms ADV to provide more information about their branch office operations and their use of social media.

As to the changing SEC landscape, departing Republican Commissioner Daniel Gallagher, who’s resigning his position early, gave in early August a Dodd-Frank “swan song” speech to the U.S. Chamber of Commerce in what he noted would likely be his “last formal speech” as a commissioner.

After ticking off a laundry list of concerns about the SEC that he’s amassed during his four years as commissioner, Gallagher said that he remains “optimistic about the SEC’s future,” and believes “that the agency is in a much better position than it was four years ago.”

However, he said the SEC’s agenda is “still all too dominated by the nonsense of Dodd-Frank, and the agency’s place in the financial services regulatory constellation is still too low.” However, Gallagher said he saw “hopeful signs of life and indicia that the SEC will go back to its roots: allowing disclosure to inform investors and preserve investor choice; letting the market, rather than regulation, decide winners and losers; and using appropriate discretion in exercising its power.”

No replacements for Gallagher or Democratic commissioner Luis Aguilar were nominated by the White House before the Senate broke for its August recess, which signals replacements for both won’t happen until the end of 2016. “For political reasons, it’s almost a sure bet that the White House will pair the nominations of the two people who are nominated — one Republican and one Democrat — to ensure a bipartisan outcome,” Tittsworth said. “All SEC confirmation votes in the Senate have been by unanimous consent.”

DOL Fiduciary Plan ‘Screaming for Reproposal’

Even after DOL weighs the comments on its plan, because the proposed fiduciary regulation and its exemptions under ERISA — particularly the Best Interest Contract Exemption — are “very complicated,” the plan is “screaming for a reproposal,” says Steve Saxon, chairman of Groom Law Group, which specializes in employee benefits.

Saxon noted in his testimony at the DOL hearings in mid-August that it “was important for the regulated community to get a sense of what changes DOL was contemplating so that they could determine whether the revised version of the proposal would be workable.” Both the DOL and the employee benefits community, he said, “would benefit from this approach.”

The idea that “no reproposal is merited because of the 2010 proposal does not make sense because so much of this proposal is new,” Saxon told IA in a separate email message. “Our sense is that the whole thing is screaming for a reproposal.”

What if Labor Secretary Perez keeps his promise and goes straight to a final rule after the DOL comment period ends? “If at the end of the day the changes incorporated by DOL make the final reg and exemptions workable, then a lot of folks will rely on them and move on,” Saxon said. “If the proposal and exemptions are not workable, then the effort, the re-work [of] the reg with the DOL will continue. At the same time, some folks will seek a legislative solution and others will seek a litigation solution.”

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