SEC Signals Intent for Uniform Fiduciary Standard

The Securities and Exchange Commission has signaled it could move sooner rather than later on its own changes to investment advice and conflict of interest rules.

Media reports are citing comments from Securities and Exchange Commission (SEC) Chair Mary Jo White, to the effect that the SEC will “implement a uniform fiduciary duty for broker/dealers and investment advisers where the standard is to act in the best interest of the investor.”

A number of industry professionals confirmed Chair White’s comments for PLANSPONSOR. The SEC’s move to step more actively into the ongoing fiduciary definition debate, which until now has been centered around the Department of Labor’s own fiduciary rulemaking, could have a big impact, notes Bob Kurucza, co-chair of Goodwin Procter’s financial institutions group and partner in its business law department.

“I’m not at all surprised that the SEC chair would have this view,” he tells PLANSPONSOR. “While she was very careful to identify that there is some disagreement among the commissioners, notably the two Republican-leaning commissioners, the majority of the commissioners are clearly interested in joining this debate more actively. And they were instructed to do so by Congress [under Section 913 of the Dodd-Frank Act], as you’ll recall.”

As explained by Kurucza, in some ways, a conflict of interest rule change from the SEC would have a wider impact than a similar move from DOL, whose investment fiduciary rule enforcement powers are granted under the Employee Retirement Income Security Act (ERISA): “If the SEC acts to establish a uniform fiduciary duty for advisers and broker/dealers, including brokers not involved in the retirement space, they will all become fiduciaries, across all business models and customer bases. No doubt, this will have a significant impact on people both inside and outside the retirement-specific investment industry.”  

While he can see the “ephemeral appeal to having a unified standard across these markets, in terms of suitability versus fiduciary,” Kurucza echoed the now-familiar warnings about what a strengthened fiduciary standard could do to advice access at the lower-balance end of the market. He believes low-balance savers, whether in a retirement plan or private brokerage account, will become “small potatoes” for advisers and brokers, should they be forced to treat all client relationships as fiduciary relationships.

“Like many others I am worried about the unintended consequences this effort might bring about, despite its intentions of improving the quality of the advice marketplace,” he says. “The low-balance people might not be worth the due diligence work that is required in a fiduciary relationship.”

Kurucza continues by suggesting “most industry practitioners know it can be really subjective and be based on the specific facts and circumstances of a given relationship—whether or not someone is your fiduciary adviser or merely a broker selling you a suitable product.” This will still be the case with a strengthened rule, he feels, especially if the new rules deny this complexity and demand all clients be treated the same. The limits of fiduciary liability will always be tested by some bad apples, he feels, so the entire industry should not be punished to deter bad behavior by a stubborn few.

“There is some well-established industry learning and some settled business practices that will have to be uprooted and overcome, should a much stronger fiduciary standard come into play at SEC,” Kurucza adds. “The current understanding of the fiduciary standard will have to change. If you apply this in the context of compliance officers at advisory firms and brokerages, it’s going to be a lot more detailed and there will be a lot more probing and examination that firms have to do.”

Interestingly, the move from the SEC comes just a few weeks after a number of Republican Congressmen emerged on the side of skeptical financial advisers in opposing the Department of Labor’s fiduciary redefinition effort—introducing ambitious legislation to block changes to the fiduciary standard.

One bill would draw a line and put the SEC at the head of it, allowing the commission to propose its definition of fiduciary first, and stopping the DOL from any rulemaking on a fiduciary definition under ERISA until 60 days after the SEC’s definition takes hold. Again, Dodd-Frank authorizes the SEC to set rules on fiduciary standards of conduct, extending them to broker/dealers.

“There is clearly overlap here between SEC and DOL, so it makes sense they would want to signal they are getting on the same page on a lot of this,” Kurucza says. “Beyond that, there is no doubt in my mind that Chairman White, the DOL and the wider Obama Administration are thinking strengthened rules will be a good thing and will benefit consumers. Many in the industry feel otherwise, so I expect much of the controversy to continue after real rulemaking language emerges, whether at SEC or DOL.”