SEC Wades Into ‘Fiduciary Rule’ Debate
June 2, 2017 by Dave Michaels
WASHINGTON—The Securities and Exchange Commission will consider strengthening rules on how brokers advise retail customers, a step likely to be cheered by businesses that opposed a similar measure passed under the Obama administration that imposed stricter guidelines.
The SEC said Thursday that it would wade into the politically charged debate over the duties brokers owe their customers when they recommend investments. Business groups hope that if the SEC finishes its own rule, it could replace the framework issued by the Labor Department under former President Barack Obama, set to partly take effect June 9.
The Labor Department’s measure, known as the fiduciary rule, applies to retirement accounts the agency regulates, such as IRAs and 401(k)s. It requires that brokers handling those accounts always put their clients’ interest ahead of their own financial gain, which makes it harder to recommend more expensive mutual funds and other products that earn a significant commission for a broker. Advocates say the rule prevents brokers’ conflicts of interest from skewing advice, while opponents say the measure simply makes it unprofitable to serve small investors.
The SEC largely stayed on the sidelines of the issue during the Obama administration. But the Wall Street regulator, now led by Chairman Jay Clayton, is showing new interest in cooperating with the Trump administration’s desire to water down the Obama-era effort to target broker bias.
In a notice issued Thursday, the SEC posed a long list of public questions that could inform how it writes a rule proposal. It also raised the possibility of requiring new disclosures of conflicts of interest that could take the place of a comprehensive regulatory rewrite. The agency said it would publish responses on its website but didn’t specify a deadline for receiving feedback.
“I believe an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends is important to the commission’s ability to evaluate the range of potential regulatory actions,” Mr. Clayton said.
Supporters of the Labor Department’s restrictions worry that an SEC rule would be weaker. The law that governs retirement-savings plans takes a much stricter view of conflicts of interest than do the securities laws enforced by the SEC.
Some brokerages have already adapted their businesses to the Labor Department’s rules.Bank of America Corp.’s Merrill Lynch and J.P. Morgan Chase & Co., for instance, said they would largely abandon commissions in retirement accounts in favor of charging a recurring fee. Edward Jones and Wells Fargo cut back on client offerings in commission-based accounts.
Others, such as UBS Group AG, have held out hope that the SEC would pass a rule that governs both retirement and individual brokerage accounts.
Small brokerages, in particular, complain that Labor’s rules clashed with the realities of the brokerage business, making it much more costly to serve less wealthy investors. Under Labor’s rule, for instance, investors can bring class-action lawsuits over violations.
“The solution for us is really almost draconian,” Bob Muh, chief executive of San Francisco-based Sutter Securities Inc., said at a regulatory conference in Washington on May 17. “We are asking all of our small accounts to leave.”
The SEC has for years vacillated over whether to strengthen protections for small investors, who typically interact with a broker earning sales commissions. Under SEC rules, brokers have to recommend investments that are “suitable” for clients, giving them some leeway to pitch products that may be more expensive for the customer and more lucrative for the broker. The Obama administration said conflicted financial advice costs U.S. investors $17 billion annually, an estimate that was called wildly inaccurate by Wall Street trade groups.
The SEC last sought public input on revising the rules in March 2013. Former Chairman Mary Jo White said in March 2015 that she favored crafting a rule to reduce the influence of broker bias, but she failed to issue a proposal before stepping down in January 2017.
Wall Street groups say investors are well served by the SEC’s rules and that sales commissions are a cheaper way to serve lower-balance investors. Richer clients sometimes pay an annual fee that is a percentage of their assets, but that pricing model isn’t economical for smaller investors, brokers say.
Labor Secretary Alexander Acosta wrote in a recent Wall Street Journal opinion column that he would allow the rule to partially take effect in June, but added he could later seek to repeal or revise it. “Although courts have upheld this rule as consistent with Congress’s delegated authority, the Fiduciary Rule as written may not align with President Trump’s deregulatory goals,” he wrote.
If Mr. Clayton moves ahead with the effort, he will have an ally in Republican Commissioner Michael Piwowar, who said in April that the agency should “fill that space” if the Labor Department’s fiduciary rule was repealed. Mr. Piwowar had said in a 2014 speech that he was disinclined to back the effort to impose stricter rules on broker advice, saying “the potential benefits seem elusive and the potential costs sky-high.” Mr. Piwowar also said at the time that he was unaware of any evidence showing retail investors were “systematically being harmed” by brokers under the SEC’s current rules.
Mr. Piwowar became a vocal opponent of the rule issued by the Labor Department during the Obama administration. He blasted the measure in March, calling it a “highly political” effort that would make it easier for trial lawyers to sue brokers.
“It was meant to be unworkable,” he said at the time.
The SEC could write the rule in such a way that it raises the standard for brokers advising retail investors, but makes it easier to maintain business practices—such as sales commissions and other incentives—that can skew the advice that a broker provides to a client.
Write to Dave Michaels at dave.michaels@wsj.com
