One of the most crucial rule proposals that will come out this year is a long-awaited fiduciary rule by the Securities and Exchange Commission.

The agency’s regulatory agenda has such a plan coming out sometime this year — with news reports pegging release to the second quarter. But the potential pending departures of two of the SEC commissioners — just as two new ones came on board — could throw a wrench into what’s already being characterized as a very challenging rulemaking process for the securities regulator.

Add to the mix a revised Labor Department fiduciary rule and a batch of new fiduciary rules being issued by the states this year, and you’ve got a real humdinger of a compliance challenge brewing. New SEC Commissioners Hester Peirce and Robert Jackson were sworn in by SEC Chairman Jay Clayton in early January, marking the first time the agency has had a full commission since 2015.

But SEC Commissioner Kara Stein’s term ended last June (commissioners can stay on for 18-months after their term has expired or someone is confirmed to replace them) while Michael Piwowar’s term ends this year.

Floating a fiduciary plan is likely doable this year, but “I’m not at all sure that the SEC can get this [fiduciary rule] finalized before Commissioners Stein and Piwowar leave,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “It could certainly complicate the process if a new set of commissioners have to get confirmed and then get up to speed on the issue.”

Clayton, Roper opines, “has done a good job of reaching out to all the commissioners and hasn’t really created a partisan environment within the Commission.” Indeed, the existence of DOL’s fiduciary rule and political pressure on the agency to coordinate with Labor on revisions and come out with its own rule will make it somewhat easier for Clayton to get everyone on board.

One Plan Fits All?

That being said, “the bigger problem has always been coming up with a plan that all five commissioners agree on,” Roper added. Clayton “does have one advantage over his recent predecessors, who were dealing with a ‘just say no’ response from the Republican commissioners. …We have the DOL to thank for that.”

While “the SEC clearly is working on a rulemaking under Section 913” of the Dodd-Frank Act, “what happens to the rulemaking will depend on the five commissioners who will consider it,” added David Tittsworth, the former head of the Investment Adviser Association who’s now counsel with Ropes & Gray in Washington.

Considering the many years of failed efforts by former SEC chairs to get a fiduciary proposal before the Commission, “plus the complex provisions of Section 913 and coordination with DOL, it would be hard to come to any other conclusion that the path to a final SEC rule will be very rocky,” Tittsworth said.

Tittsworth opines that the complexity of Section 913 will complicate the SEC’s ability to come up with a “uniform” fiduciary standard for advisors and brokers. “Section 913 is a complicated provision that reflects compromises between Democrats and Republicans and between positions advanced by investment advisory/fiduciary and broker-dealer/suitability advocates,” he said.

But Roper believes a uniform fiduciary rule issued by the SEC would not be hard to come by. “DOL has already done that, and they’ve done it in a way that complies point-for-point with the requirements of Dodd-Frank Section 913,” she argued.

“What’s been missing at the SEC has been the willingness to create a uniform standard that is meaningful — i.e., one that backs up the best interest standard with real restrictions on incentives to act against customers’ best interests.”

Given the “anti-DOL-rule rhetoric we’ve heard from this administration, including from Commissioners Piwowar and Peirce, it doesn’t seem likely that SEC would adopt a rule that was modeled on that approach,” Roper continued. If the agency tries “to get by with an approach that relies on disclosure to deal with conflicts, I’d certainly hope that they wouldn’t get any Democratic votes in support.”

While Section 913 does not require the SEC to collaborate with Labor on a fiduciary rulemaking, Tittsworth points out, the two are indeed in talks.

Indeed, while the SEC and Labor “appear committed to collaborating and sharing their expertise,” says George Michael Gerstein, an ERISA attorney with Stradley Ronon in Washington, SEC Chairman Clayton also has recognized “that the states can meaningfully contribute.”

States’ March

Why, then, “are some states marching ahead of the SEC and DOL?” asks Gerstein.

New York, for instance, has at least two bills “that potentially implicate those subject to the DOL rule: the recent proposal on recommendations of insurance products to IRAs and others, and a second regarding non-fiduciary investment advisors with respect to all accounts,” Gerstein explained.

Whether it is New York Governor Cuomo or members of the assembly, “they feel the DOL will be taking steps [in revising its rule] that are not investor-friendly.”

The New York bills “potentially accelerate confusion and compliance risk for firms during this time while we await action from the SEC and DOL,” Gerstein said.

Attorneys at Drinker Biddle & Reath agree that fiduciary rules by Labor, the SEC and the states are a recipe for confusion. With “forthcoming SEC rulemaking, and the DOL rule, as well as standards in other states,” a recent client alert stated, “issuers of certain products (and producers) face the prospect of grappling with three potentially different fiduciary/‘best -interest’ standards.”

While “the outcomes regarding fiduciary status — i.e., what is the fiduciary recommendation and what is the standard of care, may be more or less the same under each standard, licensees would still be facing potentially divergent approaches to enforcement among the regulatory agencies,” the Drinker Biddle alert stated.

Then there’s New Jersey, which has a new bill that “interplays with fiduciary status at the federal level, as does Connecticut’s new law,” Gerstein added, with both being disclosure-based.

Nevada “takes it one step further by imposing its own fiduciary standard and requirements on advisors and broker-dealers,” Gerstein explained. While Nevada’s law passed last year, “it needs regulations to spell out how firms can comply.”

The Nevada securities regulator could release these regulations sometime this year, he says.

As with New York, “Nevada specifically pointed to a potential rollback of the DOL rule as an impetus” for the state moving on its own fiduciary standard, Gerstein added. “Preemption remains an issue, and is something to watch.”

Massachusetts, he adds, has a bill that “went nowhere” but could be reintroduced in 2018, while “a number of states are taking a wait-and-see approach” before entering the fiduciary fray until the DOL revisions surface and the SEC floats its fiduciary rule.