March 5, 2018
- President, TD Ameritrade Trust Company
Managing Director of Advisor Advocacy & Industry Affairs
Just when you thought the Securities and Exchange Commission had shelved all work on the fiduciary standard, rules governing broker and adviser conduct are back in the spotlight.
Jay Clayton, who last year took over as SEC chairman, has declared that broker and adviser standards are a high priority for the coming year and that the commission could propose a new conduct rule as early as this spring.
The conventional wisdom says the SEC is eager to hammer out a rule before July 1, 2019, when remaining provisions of the Department of Labor’s Conflict of Interest Rule are scheduled to come into effect. It is therefore possible that the SEC rule could play a role in how advisory firms comply with the DOL rule, fundamental provisions of which went into effect in 2017.
Compared with Congressional efforts under Dodd-Frank to impose a uniform standard “no less stringent than the ‘40 Act” on brokers, the latest flavor of fiduciary standard comes with an important new twist: Some signs point to the commission leaving the ’40 Act in place, as is, for registered investment advisors, but elevating broker standards to incorporate elements of a fiduciary standard, such as duty of care and duty of loyalty, as well as enhanced disclosure requirements.
We still hear talk of “harmonizing” the rules between brokers and RIAs, which fiduciary advocates argue would water down standards instead of strengthening them. We agree diluting the ‘40 Act standards would be bad for investors and undermine a key differentiator for fiduciary advisors.
Generally speaking, brokers seem willing to live with a higher standard of care — but not the ’40 Act — when giving nondiscretionary advice. That said, you may still see the SEC pursue harmonization of the rules regarding nondiscretionary advice.
On a related front, we may see the SEC tackle rule-making around the usage of professional titles in the marketplace. The ’40 Act carved out an exemption from registration for brokers, as long as any advice they give is “solely incidental” to their role as brokers. But if a broker markets themselves as an “advisor,” it would clearly seem that advice is not solely incidental to their business.
In our view, the SEC should clarify the usage of titles and, better still, enforce the law that’s already on the books. This might go a long way toward reducing investor confusion.
DOL Rule provides motivation
All this SEC activity comes after the DOL delivered its hotly-contested conflict of interest rule. Contrary to perception in some quarters, the DOL rule is on the books. Though some elements have been postponed until 2019, the foundation of the rule is in place: if you deliver advice to a retirement investor for compensation, you are now a fiduciary under ERISA.
And if you receive variable compensation, you must adhere to the Impartial Conduct Standards: 1) make no materially misleading statements; 2) charge only reasonable compensation; and 3) deliver advice that is in the best interest of the client regardless of your compensation.
It is the other parts of the rule — contract requirement, warranties and disclosures, and litigation mechanism – that have been pushed back to July 1, 2019. The DOL also says it won’t pursue enforcement action in a particular case if it believes the financial institution in question took steps to comply.
For most RIAs, the DOL rule likely has the most impact when advising clients to roll over retirement assets from an employer plan to an IRA managed by the adviser. You must ensure that your advice to roll over is in the best interest of the investor, even if that means advising the client to leave money in their 401k plan.
States and industry bodies
In the absence of an SEC fiduciary standard, several other regulatory bodies have in the past year taken steps to develop their own rules.
The CFP Board recently proposed rules that would require CFPs – whether brokers or investment advisers — to operate under a fiduciary standard in almost all services provided to clients, extending the fiduciary standard beyond financial planning to include the delivery of financial advice. A revised proposal was in a public comment period in January 2018.
Several state regulators — Nevada, Connecticut, New York and New Jersey — also are moving on this front, while four other states have common law interpretations that suggest a mandated fiduciary standard. Though we applaud any movement toward higher standards, this balkanized approach creates complexity, especially for firms that do business in multiple states.
Falling off the list
Even as the fiduciary standard is moved to the front burner, some formerly top priorities have fallen to the wayside.
Mandatory business continuity plans, which were proposed by the SEC in the waning months of the Obama administration, have been shelved.
We think it is good business practice to have a thorough business continuity plan in place for various contingencies, such as a natural disaster, a cyber breach, or the incapacitation of a firm principal. The SEC proposal would have mandated that, though perhaps taking things too far by suggesting a failure to have a “sufficiently robust” plan in place would have constituted fraud under the ’40 Act.
A program to supplement SEC adviser examinations with third-party exams is also no longer under consideration. The SEC examined about 15 percent of all investment advisers last year, compared with roughly half of broker-dealers examined by FINRA examines each year. Under pressure to find ways to step up the pace, the SEC in 2016 said it was considering third-party exams for RIAs, though it never seemed enthusiastic about the idea.
These are just some of the headline issues we are following for you. We continue to work closely with the trade associations and other advocacy groups to amplify your voice with policy makers. As always, we welcome feedback and questions.