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SEC Chair’s Fiduciary Standard Views Echo Sifma

By Rita Raagas De Ramos October 26, 2017

New SEC chairman Jay Clayton doesn’t want to pursue a uniform fiduciary standard across the industry, reasoning that there are different business models that apply to the way investor money is managed and that investors should be able to retain their freedom to choose their financial professionals.

These are the thoughts Clayton shared on the fiduciary rule during a Q&A session at Sifma’s annual meeting in Washington, D.C. on Tuesday. Some believe they are strikingly similar to Sifma’s own views.

Clayton started the session by stressing that his answers are his own views and do not necessarily reflect the views of the SEC.

“The idea that there’s a silver bullet … that solves all of this, I think, is not something to pursue,” he said. “And the reason I say that is you can’t deliver everything that everyone would want. Some investors want a different relationship, a different standard.”

Clayton said it is important to preserve the existence of various business models and investor choice when crafting fiduciary rules.

“You have to have clarity in the choices that people can make in terms of the relationship investors can make when they are choosing their financial professionals,” he said.

Many pundits think Clayton’s remarks on the fiduciary standard debate are a good indication of where he’s leaning on the controversial issue, providing the industry with clues about what it can expect from the SEC. His thinking about different business models and investor choice is similar to the arguments put forward by Sifma in the group’s July 21 comment letter.

That Sifma comment letter was a response to a June call from Clayton for public comments from retail investors and other interested parties on standards of conduct for investment advisors and broker-dealers. The input being gathered by Clayton is meant to “advance and inform the SEC’s assessment of possible future actions.”

Back in June, Clayton said the range of potential actions suggested to the SEC had been broad, including: maintaining the existing regulatory structure; requiring enhanced disclosures intended to mitigate reported investor confusion; the development of a best-interest standard of conduct for broker-dealers; or pursuing a “single standard of conduct combined with a harmonization of other rules and regulations” applicable to both investment advisors and broker-dealers when providing advice to retail investors.

Sifma believes broker-dealers and RIAs should not be lumped into one category when crafting fiduciary standard rules because they have different business models. These different business models let broker-dealers and RIAs charge investors differently, depending on the services they require, and it gives investors the freedom to choose the business model most suitable to their needs, according to Lisa Bleier, the group’s associate general counsel and managing director for public policy and advocacy.

Bleier says Sifma is “asking the SEC to consider a separate best-interest standard for broker-dealers, but one that would cover all products.” That means “any interaction a client has with a broker-dealer would be covered by a single standard,” and that standard would cover a duty of loyalty, a duty of care and enhanced upfront disclosures, she says.

Broker-dealers don’t always give advice, which allows them to potentially charge lower overall fees compared with RIAs, she says. Broker-dealers who are not necessarily providing their clients with advice will be forced to increase the fees they charge clients because of the costs associated with complying with new fiduciary standard rules, she says.

Examples of activities of broker-dealers that don’t include giving advice, according to Bleier, include providing general research and strategy literature; discussing general investment and allocation strategies; seminar content that is not specific to a customer; general marketing and education materials that are not specific to a customer; financial planning tools and calculators that use customer information but do not recommend specific securities; providing web sites where retail customers use tools to analyze securities to make self-directed investment decisions; holding securities, including concentrated positions or other complex or risky investment strategies, at the customers’ request in a nondiscretionary account; and taking and executing unsolicited customer orders.

Clayton said he recognizes that “having the choice to participate through a broker-dealer relationship in the capital markets is something investors will continue to want,” adding, “I’m not saying that just because I’m here” at the Sifma annual meeting.

FA-IQ reached out to Sifma to find out whether it has directly received any feedback from Clayton on its July 21 comment letter, and for a reaction to Clayton’s recent remarks. Without addressing those questions, Sifma reiterates that it “has long supported a best-interest standard for brokers, for all accounts where advice is provided, established under the federal securities laws.”

Jay Clayton

Sifma adds it “will continue to support the establishment of a single best interest standard which operates in harmony and consistency with all existing standards of conduct, including the current broker-dealer, investment advisor, and DOL rule regulatory frameworks, as well as any future rulemaking by the SEC or Finra.”

At the Sifma annual meeting, Clayton said the SEC has “the authority” in the fiduciary standard rulemaking space, but acknowledges that it needs to cooperate with the Department of Labor and various states because they also have their responsibilities.

“That’s how we’re looking at this as we move into the debate,” he said.

Clayton expects any new fiduciary standard rulemaking initiative by the SEC – if it does take place – to be challenging. “If this were easy, it would have been solved long before I got here,” he said, adding the problem has “been around for a while.”

Some legislators and regulators argue a uniform fiduciary standard is the best approach to investor protection because it would be the most easily understood solution. Others, like Sifma, disagree because of the challenges of coming up with an all-encompassing, uniform fiduciary standard. Others, like the Consumer Federation of America, object because they believe the compromises required to reach uniformity would result in a weak and ultimately ineffective fiduciary standard.