SEC Chair Clayton’s Recent Fiduciary Comments Are Revealing

Back in mid-May the U.S. Department of Labor (DOL) confirmed that it will not seek to further delay the June 9, 2017, applicability date of the new fiduciary rule defining investment advice standards and establishing the best interest contract exemption (BICE) and other related exemptions under the Employee Retirement Income Security Act (ERISA).

As readers likely recall, a big part of the debate surrounding the crafting of the fiduciary rule—approved in the waning days of the Obama administration but left to his predecessor to fully implement—involved disagreement about whether the significant expansion of regulatory power for the DOL infringed on the proper jurisdiction of the Securities and Exchange Commission (SEC). There was particularly strong debate about whether it is appropriate that, under the fiduciary rule expansion, DOL gains strong policing powers over large swaths of the individual retirement account (IRA) rollover marketplace.

This week a fresh voice joined the discussion, that of the newly Trump-appointed SEC Chair Jay Clayton. In a brief public statement delivered June 1, Clayton “welcomes the Department of Labor’s invitation to engage constructively as the Commission moves forward with its [own] examination of the standards of conduct applicable to investment advisers and broker-dealers, and related matters.”

Clayton’s comments continue: “I believe clarity and consistency—and, in areas overseen by more than one regulatory body, coordination—are key elements of effective oversight and regulation. We should have these elements in mind as we strive to best serve the interests of our nation’s retail investors in this important area.”

He goes on to observe that the range of potential actions previously suggested to the Commission is broad and includes very diverse proposals, “from maintaining the existing regulatory structure, to requiring enhanced disclosures intended to mitigate reported investor confusion, to the development of a best interests standard of conduct for broker-dealers, and, finally, to pursuing a single standard of conduct combined with a harmonization of other rules and regulations applicable to both investment advisers and broker-dealers when they provide advice to retail investors—and a variety of points in-between.”

Clayton says he “believes 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.” He urges stakeholders with supportive and critical opinions on all these matters to share their thoughts via a webform and/or the designated email address: rule-comments@sec.gov.

NEXT: Reading the comments in context 

Clayton’s commentary lists a whole host of questions he and the Commissioners are considering. In the defined contribution (DC) plan and IRA advisory space, the following questions are raised: “Is there a trend in the provision of retail investment advice toward a fee-based advisory model and away from a commission-based brokerage model?  To what extent has any observed trend been driven by retail investor demand, dependability of fee-based income streams, regulations, or other factors?  To what extent is any observed trend expected to continue, and what factors are expected to drive the trend in the future?”

The questions continue: “How has any observed trend impacted the availability, quality, or cost of investment advice, as well as the availability, quality, or cost of other investment products and services, for retail investors? Does any such trend raise new risks for retail investors?  If so, how should these risks affect the Commission's consideration of potential future action? Although the applicability date of the Department of Labor's Fiduciary Rule has not yet passed, efforts to comply with the rule are reportedly underway.  What has been the experience of retail investors and market participants thus far in connection with the implementation of the Fiduciary Rule?  How should these experiences inform the Commission's analysis?  Are there other ways in which the Commission should take into account the Department of Labor's Fiduciary Rule in any potential actions relating to the standards of conduct for retail investment advice?”

Clayton’s language, while admittedly somewhat cryptic, may surprise some supporters of the Trump administration—especially fans of the president’s anti-regulatory rhetoric who initially expected the Obama-era fiduciary rule expansion to be completely done away with. Indeed, the outline from Clayton about potential SEC actions sounds not at all dissimilar to the language used by former chair Mary Jo White, remembered for taking an aggressive approach to SEC oversight under President Obama.

Under White’s leadership, SEC launched an ambitious effort to expand its role in policing the retirement investing industry. Readers may recall the 2015 launch of the “Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative,” as a prime example. That effort had SEC examinations staff closely review whether registered representatives and their firms met their obligations under the securities laws and self-regulatory organization (SRO) rules, with regard to selection of account types—especially rollovers from defined contribution plans to an individual retirement accounts—and performing diligence on retirement investment options, initial investment recommendations and ongoing monitoring of investments.

White also caught the attention of retirement specialist financial services providers when she signaled the SEC could sooner-rather-than-later move ahead on potentially changing its rules for how advisers and brokers must address and disclose conflicts of interest. Much of the industry speculation was that the SEC’s independent advice standards would soon be made to look more akin to the approach historically taken by the Department of Labor (DOL)—considered by many to be a higher standard of care. 

Clayton has not yet revealed publicly to what extent he will direct the Commission to forge ahead on all these various efforts, but the language about “harmonizing” regulatory requirements released this week is revealing. It seems to open up at least the possibility that SEC and DOL will together continue to take an active and expanding role in policing adviser conflicts of interest across various aspects of the retirement plan marketplace.