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SEC Is ‘Where Fiduciary Ideas Go to Die’

By Murray Coleman September 12, 2017

Leading politicians on Capitol Hill seem to be coalescing around the idea of a uniform fiduciary standard for brokers and advisors alike. But many advisors and industry observers remain skeptical about the SEC brokering such a deal.

“The SEC has had more than 20 years to address these issues but in each case they’ve either dropped the ball or made things worse,” says Micah Hauptman, financial services counsel for the Consumer Federation of America in Washington, D.C.

He thinks the only “significant” pro-investor “improvements” made in this area have come from the Department of Labor, which in June was granted partial implementation of a new rule creating fiduciary standards in retirement planning.

While consumer advocates say they remain hopeful the SEC will use the DOL rule as a model to expand fiduciary standards to cover brokerage accounts, many are wary.

That’s certainly the case with Hauptman, who works at a nonprofit representing 300 different consumer organizations. “We remain skeptical that any meaningful action will be taken by the SEC on these matters,” he says.

Hauptman isn’t predicting open opposition to higher fiduciary standards across retirement and non-retirement accounts. “But we are expecting to see industry groups work to dilute any possible SEC action by pitting regulators against one another,” he says in reference to the deep-pocketed brokerage industry.

Any SEC movement comes against the backdrop of a delay in full implementation of the DOL rule until mid-2019. Meanwhile, SEC chairman Jay Clayton has called for comments about ways to reduce potential conflicts of interest between clients and investment professionals across accounts.

“The SEC has a history in the retail wealth industry as a place where fiduciary ideas go to die,” says Marcia Wagner, an estate planning and Erisa attorney in Boston.

Even so, she believes a better educated public – along with a more informed mainstream media – might finally force regulators’ hands.

“Finally after a quarter of a century I see real hope out there for harmonization between the DOL and the SEC this time around,” Wagner says.

Whether that happens or not, advisors need to keep their expectations in check, says Bonnie Treichel, chief compliance officer for Multnomah Group in Portland, Ore.

The attorney for the independent RIA, which manages about $17 billion, says the SEC's latest retail fiduciary initiative traces its roots back to 2011. That’s when Dodd-Frank legislation prompted an SEC review of investment sentiment about advice-giving.

“Advisors need to realize that we’re talking about a process that has been evolving in its present form over six years,” Treichel says. She’s warning that “nothing close to actionable” for practitioners is on the horizon.

“Our concern at this point,” Treichel says, “is that any eventual SEC effort to meet the DOL somewhere in the middle will wind up creating a very watered-down fiduciary standard – both for retirement and non-retirement planning.”

Dean Harman

Even if the SEC and DOL get together on developing unified standards, Congress and the Trump administration need to agree on increased funding for enforcement, says Dean Harman, an advisor in suburban Houston.

Besides running an independent RIA which manages nearly $400 million, he serves on the board of the Financial Services Institute. The FSI represents about 39,000 broker-dealer-based investment professionals.

Harman met last week with GOP representatives Ann Wagner of Missouri and Phil Roe of Tennessee. Both are DOL rule opponents but favor the SEC’s work to develop a unified fiduciary standard.

“It definitely would be naïve to think that uniform fiduciary standards will be at the top of lawmakers’ agendas this year – they’ve got tax reform, health care, North Korea, infrastructure plans and mid-term elections on their plates,” Harman says.

He remains hopeful of SEC intervention since “it’s more likely to enact regulations that are more practical for our profession.”

Chief on his list of possible reforms are rollbacks of the DOL’s BICE provision. Such a so-called best interest contract exemption in the DOL rule requires brokers to provide written details about fee structures and costs, among other things.

Currently the BICE also lets clients file class-action lawsuits; however, the DOL has indicated it is likely to drop this provision. In any case, “the SEC already has an enforcement structure in place to handle complaints about both retirement and brokerage accounts,” Harman says.

Despite his support for a bigger SEC role, Harman agrees a lot of uncertainty remains in coordinating political and industry support for a uniform fiduciary standard. “It’s still very much a moving target,” Harman says. “But I remain cautiously optimistic that a logical and practical solution will be put forth at some point by the SEC.”