‘Fiduciary Rule’ Poised for Second Life Under Trump Administration
January 17, 2018 by Dave Michaels
WASHINGTON—The Trump administration’s threat to dismantle Obama-era rules that cracked down on conflicted advice from stockbrokers won’t mean no rules at all. Instead, they could emerge from a different regulator who Wall Street knows a little better.
The Securities and Exchange Commission is accelerating work on its own version of the “fiduciary rule,” a regulation issued by the Labor Department that put restraints on brokers handling retirement accounts. The SEC’s effort would affect all brokerage accounts—not just those for retirement funds—and could ban brokers from calling themselves financial advisers unless they accept a strict duty of loyalty to clients.
The SEC hopes to vote to propose its rules by the second quarter of 2018, according to people familiar with the matter. That would be a first step toward creating consistent federal standards for all brokerage accounts, since the Labor Department’s rules only covered 401(k)s and individual retirement accounts, or IRAs.
Consumer groups that backed the fiduciary rule, introduced at the end of the Obama administration, are likely to oppose the SEC proposal if they believe it would give Wall Street an end run around Labor’s stricter approach. Those groups will watch for how the SEC goes after conflicts of interest such as bonuses and perks that brokerage firms provide to their employees for selling particularly lucrative products, said Barbara Roper, director of investor protection for the Consumer Federation of America.
“It’s difficult to see how they can come up with a solution that does not land them in court,” Ms. Roper said. “If they propose a rule we like, industry will sue them. If they give industry a disclosure-based best interest standard that they want, we’ll sue them.”
Brokers including Fidelity Investments say existing regulations enforced by the SEC sufficiently protect clients. Any changes, Fidelity wrote in a recent letter to SEC Chairman Jay Clayton, should focus on disclosures that explain a broker’s conflicts of interest, such as how much they earn from recommending different products.
Groups such as Ms. Roper’s say disclosures aren’t enough because many retail investors don’t understand a broker’s financial incentives. Similarly, the trade group for investment advisers wants the SEC to impose a standard on brokers that is “as robust as” the fiduciary duty its members face.
The SEC has struggled for years to harmonize the rules brokers and investment advisers face when they serve retail clients. Use of the term “financial adviser” has muddied the waters further for less sophisticated investors, who may not understand the “buyer beware” culture that pervades the securities business.
SEC Commissioner Michael Piwowar has pushed for banning the “financial adviser” title unless a broker has accepted a fiduciary duty to act in the investor’s best interest, according to a person familiar with the matter. Mr. Piwowar told a conference audience in March that the name “means absolutely nothing” today.
If the SEC proposes to ban the term, Ms. Roper said, the agency should also restrict how brokers market their services. Without that, she said, brokers and insurance agents will adopt a different moniker, like financial counselors or wealth managers. “Mr. Piwowar has a fundamentally sound idea, but I think it needs to be treated more broadly,” she said.
The SEC staff has held meetings in recent weeks with brokerage firms including Charles Schwab Corp. and Wells Fargo Advisors, a unit of Wells Fargo & Co., as well as trade groups such as the Securities Industry and Financial Markets Association and the Financial Services Roundtable, according to regulatory filings and people familiar with the matter.
Groups such as Sifma and the Financial Services Roundtable lobbied against the Labor Department’s measure several years ago and pushed instead for the SEC to write a broker-conduct rule that would govern all accounts. Sifma said the SEC understood the brokerage industry well enough to write regulations that wouldn’t disrupt the interplay between investors and financial professionals.
The SEC proposal could emerge later than the spring of 2018 because the agency will add two new commissioners in the coming weeks. Both new members, Robert Jackson and Hester Peirce, could want time to study a proposal that will generate scrutiny on Capitol Hill.
The SEC’s measure could affect future revisions to the Labor Department’s rule affecting retirement accounts. Some brokers, including Fidelity Investments, want Labor to exempt firms that comply with a new SEC standard from the fiduciary rule. That would allow the SEC to again regulate all brokerage activity, including retirement investments, and wouldn’t require the Labor Department to go through the cumbersome process of revising its regulation.
The Labor Department under the Trump administration has delayed important parts of its fiduciary rule until July 2019, saying the rule has reduced choices for investors and imposed huge compliance duties on industry. The Labor Department noted possible action by the SEC when it decided in November to delay enforcement of its rule.
Write to Dave Michaels at dave.michaels@wsj.com
