SEC Investor Advocate Rick Fleming.

Securities and Exchange Commission Investor Advocate Rick Fleming is worried that a fiduciary duty rule promulgated by the agency could “lead to harmful outcomes for investors.”

Fleming detailed his concerns in the Investor Advocate office’s biannual report to Congress, sent to lawmakers on Thursday.

In the report, Fleming notes his previous worries about the challenges the Commission would face in promulgating a fiduciary standard for broker-dealers, citing “conflicting mandates” in Section 913 of the Dodd-Frank Act that the agency would have to follow when writing such a rule.

Section 913 of Dodd-Frank “contains what appear to be conflicting mandates: to develop a standard for broker-dealers no less stringent than the existing standard for investment advisors while accommodating sales-based compensation and the sale of proprietary products or limited product lines,” Fleming wrote.

Section 913 also prohibits the Commission from requiring a broker-dealer to have a continuing duty of care or loyalty to the customer after providing personalized investment advice, he pointed out.

These conflicting mandates could “dilute the existing standard for investment advisors in a misguided attempt to adopt a ‘harmonized’ standard for broker-dealers,” Fleming said.

Further, while the agency’s effort to issue a fiduciary rule “may be intended to reduce investor confusion surrounding the differing standards of care for investment advisors and broker-dealers, a poorly designed rule could cause even greater confusion by purporting to give investors the protection of a ‘fiduciary duty’ that would, in fact, be less stringent than the traditional fiduciary duty that applies in other relationships of trust.”

If the Commission proceeds with promulgating a fiduciary rule for broker-dealers, Fleming said, “it must adopt a meaningful standard by drawing the Section 913 exceptions as narrowly as possible.”

SEC Chairman Jay Clayton told lawmakers on June 27 that he intends to “move forward” on a fiduciary rule, in collaboration with the Department of Labor. “Look, it’s not separate; what’s happening at the Department of Labor is going to affect the markets we [the SEC] regulate and vice versa. It’s my intent as chairman to try and move forward and effectively deal with that, in a way that is coordinated so that our Main Street investors have access to investment advice and access to investment products,” Clayton said.

On June 1, Clayton also announced that the agency is seeking comment on a laundry list of issues to inform “possible future actions” by the agency on a fiduciary duty rulemaking.

Comments continue to flood into the agency on the standards of conduct for investment advisors and broker-dealers.

Kent Mason, a partner at Davis & Harmon in Washington, stated in his comment letter that Labor’s fiduciary rule is “already doing great harm to small investors, depriving them of access to investment advice in many cases and pricing them out of the advice market in other cases. These adverse effects are poised to become much worse when the new IRA private right of action becomes applicable, which is currently scheduled to occur” on Jan. 1.

The “right answer” in proceeding with a fiduciary rule for brokers and advisors is for the DOL “to hit the pause button” on the Jan. 1 portion of the rule “while it conducts a thorough review of the rule in coordination with the SEC,” Mason said.  

The objective of that coordinated effort “should be the development of a workable SEC best interest standard that requires broker-dealers to act in the best interest of their clients, and is coordinated with the DOL rule,” he argued.

If, however, Labor’s rule is “fully finalized in an unhelpful form, then any SEC action would be in addition to the DOL rule, not in lieu of the DOL rule, which would simply be unhelpful,” Mason said.

Davis & Harmon, via their comment letter, asks “the SEC to work with DOL on delaying the Jan. 1, 2018, portion of the fiduciary rule until a coordinated uniform rule is developed by DOL and the SEC together,” Mason said. 

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