SEC Chairman Jay Claytpn
Photo: Andrew Harrer/Bloomberg

Uncertainty surrounding the Labor Department’s fiduciary rule continues after the U.S. Court of Appeals for the 5th Circuit voted in mid-March to nullify the 2016 rule. Labor said shortly after the appeals court ruling that because the 5th Circuit vacated the fiduciary rule in its entirety, “pending further review, the Department will not be enforcing the 2016 fiduciary rule.”

At the Securities Industry and Financial Markets Association’s annual compliance conference in mid-March, though, Securities and Exchange Commission Chairman Jay Clayton said the appeals court ruling won’t deter the securities regulator from moving full steam ahead with its own fiduciary rulemaking.

Seventy-two hours after the 5th Circuit Court of Appeals struck down Labor’s fiduciary rule, “It hasn’t affected the way I’m approaching this” SEC fiduciary rulemaking, said Clayton during a question-and-answer session at the conference, which took place in Orlando, Florida.

Ken Bentsen, president and CEO of SIFMA, queried Clayton if the agency would release a fiduciary proposal “soon.” Clayton responded: “Soon is fair. From my perspective, the sooner the better. I’m not sitting on this.”

Bentsen asked if the 5th Circuit decision would “affect [the SEC’s] timing” on releasing its own fiduciary rule. “I think there’s a lot going on there [in the ruling] for what it means for the Department of Labor,” Clayton replied. “I haven’t had any discussions with the Department of Labor on what it means from a broader perspective of administrative law and the approach to administrative law. We’ll see, but as far as I’m concerned, we’re moving forward.”

The U.S. Court of Appeals for the 5th Circuit voted 2-1 on March 15 to vacate the Labor Department’s fiduciary rule. The nine plaintiffs in the 5th Circuit case included the U.S. Chamber of Commerce, SIFMA and the Financial Services Institute.

The ruling came one day after Labor won a case in federal court brought against its fiduciary rule by Market Synergy Group, an insurance distributor. The U.S. Court of Appeals for the 10th Circuit ruled that Labor did not “arbitrarily treat fixed indexed annuities differently from fixed annuities” under its final fiduciary rule.

Kansas-based Market Synergy Group (MSG) had argued that Labor threw FIAs under the fiduciary rule’s best-interest contract exemption, or BICE, at the last minute.

“According to MSG, the DOL simply did not give notice that it might exclude FIAs from PTE 84-24 and therefore did not give adequate notice of the final rule,” the ruling states. “We are unpersuaded. The [notice of public comment and review] clearly asks for comment on whether removing variable annuities from PTE 84-24 but leaving FIAs and fixed rate annuities struck the appropriate balance.”

Dale Brown, president and CEO of the Financial Services Institute, said that while the appeals court’s decision “in our favor is critical because the rule would have pushed the cost of retirement advice and planning services out of the reach of many Main Street investors, our work is far from over.”

FSI, he said, is “now redoubling our efforts to support the SEC’s current push to create a uniform standard that protects investors and their full access to the advice, products and services they depend on to save for a dignified retirement, care for aging parents and educate their children.”

However, Micah Hauptman, financial services counsel for the Consumer Federation of America, said the 5th Circuit case “was wrongly decided. The industry opponents went forum shopping and finally found a court that was willing to buy in to their bogus arguments.”

The opinion, Hauptman added, “is extreme by any measure. It strikes at the essence of the DOL’s authority to protect retirement savers under ERISA. It’s not only an attack on the rule, it’s an attack on the agency.”

SEC Fiduciary Rule

At SIFMA’s mid-March compliance event, Clayton said a client’s relationship with his or her financial professional usually includes dealing with “at least five” regulators.

“I’ve convinced myself that we need to do something to try and bring that five, six, seven number [of regulators] down, and I would like the SEC’s action in this area to be the focal point around which people say, ‘Yes, that’s how we should look at the relationship. That’s the basis on which you should have to demonstrate compliance.’ That is the objective. How we get there we’ve been working very hard on.”

Noting the comments that have been filed regarding an SEC fiduciary rulemaking, Clayton said that “most people believe there should be a clearly articulated standard for broker-dealers, and that you can bring some clarity as well to the investment advisor standard, which has been talked about a lot but not in great substance,” Clayton said.

“I see no objection to my view that we should do our best to clarify, in plain language, what that standard means. I think we’ve demonstrated that you can do that in a fairly short plain English document.”

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@alm.com.

SEC Execs Talk Form ADV, Custody Rule

Paul Cellupica, deputy director of the Securities and Exchange Commission’s Division of Investment Management (IM), told advisors in mid-March that with the new changes to Forms ADV Part 1A, which took effect on Oct. 1 and require advisors to provide more information on their use of separately managed accounts, branch office operations and social media, he expects IM to be “getting much more robust data on separately managed accounts from advisors to institutional clients and the types of strategies they’re using.”

While amended Form ADV filings were due on March 31, a Saturday, the Investment Adviser Registration Depository (IARD) “is open for business,” Cellupica said at the Investment Adviser Association’s annual compliance conference in Washington, which took place in mid-March.

Amended Form ADV requirements took effect on Oct. 1, but many RIAs whose fiscal year ends with the calendar year were filling out the new form by March 31. Form ADV Part 1 is the form that the SEC uses to analyze the industry and that its exam unit, the Office of Compliance Inspections and Examinations, relies on to assess a firm’s risk.

While the commission and staff “has always been interested in data,” Cellupica said, the agency now makes “much greater use of data,” and has “much more robust ways of using data,” noting the agency’s Office of Analytics, which is dedicated to analysis.

Cellupica also said that the IM division is exploring whether “clarification guidance is appropriate” in response to the feedback the agency has gotten on the IM division’s February 2017 no-action letter on advisors’ imputed custody of client assets.

Dahlia Blass, IM’s director, who sat on the panel with Cellupica, told advisors that a fiduciary rulemaking is on the agency’s “very, very short-term agenda,” noting that SEC Chairman Jay Clayton has “made it very clear the principles that have to guide what we put together — maintaining choice for the retail investor and clarity” surrounding “relationships and standards of conduct.”

Blass also reminded attendees that the agency’s spring reg-flex agenda is “coming out shortly.” Items on the agenda are actions that the agency wants “proposed for adoption by the end of September.”

At the compliance event, IAA President & CEO Karen Barr said that among the top concerns that the group has voiced to the SEC includes a request that the agency conduct a retrospective review of rules “that are old, outdated, need to be modernized” like the advertising rule, the custody rule, the pay-to-play rule and e-delivery.

“We’re also hoping that the SEC takes on the definition of small business,” Barr said, because as it stands now small businesses are defined “as those with $25 million in assets or smaller, which applies to no one registered with the SEC at this time.” —Melanie Waddell