It’s difficult to keep a secret in Washington, D.C. Word leaked on Wednesday that the Securities and Exchange Commission plans to introduce its own fiduciary proposal governing brokers by the second quarter of 2018.
SEC staff has been meeting with wirehouses, securities attorneys and associations over the past few weeks to get input on a fiduciary proposal that would harmonize with the partially implemented fiduciary standard the Department of Labor finalized in 2016, the Wall Street Journal reported.
While the DOL fiduciary standard only applies to retirement assets, the SEC is working on a proposal that would apply to both the retirement and non-retirement asset advice that brokers sell, sources said.
“The SEC appears anxious to move forward and tackle the fiduciary rule,” Duane Thompson, senior policy analyst with FI360, told Financial Advisor.
While no one expects the DOL rule, as it is written today, to be fully implemented in July 2019—the date major sections of the rule has been postponed to—the DOL has indicated it expects to begin proposing modifications beginning this summer.
“That’s why the SEC is moving ahead with its aggressive schedule,” Thompson said. “The SEC can’t afford to be on the sidelines. Even if 18 months sounds like a long time, fiduciary rule making is highly complex and highly controversial and SEC regulators will need every minute to finalize a rule before the DOL fiduciary rule goes into effect.”
Besides regulating conflicts of interest, the fiduciary standard the SEC is working on is expected to dictate who can and cannot call themselves a financial advisor. Those who don’t subscribe to the fiduciary standards would be barred from using the term.
While SEC Chairman Jay Clayton has said he would work with the DOL on best interest standards, proponents of a strong fiduciary rule worry that the SEC may water down existing regulation for advisors to appease Wall Street and wirehouses.
Investment advisors already have an explicit fiduciary, or best interest, requirement that requires them to put their clients’ interests above their own. In contrast, brokers lack an equivalent fiduciary standard despite their headlong move into the fee-based advice arena. Brokers are governed by a suitability standard which requires only that a broker recommend a product or service that is good enough for a client—even if there are products that perform better and would cost the investor less.
There’s also the fear among consumer groups like the Consumer Federation of America that the SEC standard will be less stringent than the DOL fiduciary rule. “There is fear that the SEC will not come out with a rule that applies as robust a fiduciary standard as you have with ERISA,” Thomson said.