A Close-Up View of the SEC's 'Fiduciary' Proposal

More Details Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, explained that the SEC needs to provide guidance on three “critical” issues: “What is the standard of care for registered investment advisors, who are already fiduciaries under the securities laws? What is the standard of care for broker-dealers when providing advice to retail investors? How are conflicts of interest to be disclosed and/or mitigated?”

According to Reish, the SEC’s plan will “clarify and add detail” to the fiduciary standard for RIAs. “Right now, there isn’t any comprehensive and integrated explanation of the duty of care and loyalty owed by RIAs to investors.”

Karen Barr, president and CEO of the Investment Adviser Association, stated that IAA is pleased that the SEC “is not proposing new conduct rules under the Advisers Act,” and that the proposal is also expected to include a provision for “interpretive guidance” under the Act.

The fiduciary duty under the Investment Advisers Act, Barr maintains, “is well-understood and has served investors, the economy and the capital markets well for more than 75 years,” adding that IAA is encouraged that the SEC plans to solicit comment from the industry on any proposed interpretive guidance.

Roper sees the SEC’s plan to clarify the Advisers Act standard as “a positive sign.” The SEC, she said, “has too often been willing to tolerate harmful conduct under the Advisers Act as long as it is disclosed. I’m hoping that their clarification will be that it is the harmful conduct that violates the rule and not just the lack of disclosure.”

CFA, Roper continued, also will be looking for “any willingness on the part of the SEC to rein in toxic incentives that encourage harmful advice. I’m realistic enough to know they [the SEC] aren’t going to be as tough on conflicts” as the Labor Department’s fiduciary rule was.

Standard of Conduct As to the securities regulator’s intent to establish a standard of conduct for broker-dealers, Reish explained that beyond the broker-dealer “suitability” standard, the SEC likely will create “a more demanding standard with a duty of loyalty.”

Roper added that she sees the standard for brokers being characterized as “a best-interest standard, rather than a fiduciary duty.” The question is, she adds, “whether it will actually require brokers to act in their customers’ best interests, or whether it will simply tinker around the edges of the suitability standard.”

What About Conflicts? Roper explained that her hope is that the SEC will “at least prohibit firms from creating incentives (e.g., quotas for the sale of proprietary products …) that encourage brokers to base their recommendations on their own financial interests rather than the customer’s best interests.”

It’s one thing, she continued, “to say firms are going to carefully manage conflicts that naturally occur in the market (like the conflicts associated with differential compensation). It’s another thing to say they are going to manage the conflicts they intentionally create.”

Reish sees the SEC relying on disclosures to shine a light on conflicts. “Chairman Clayton has been talking about shorter and simpler disclosures, perhaps only a few pages long,” he said.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].