SEC’s Division Delays Its Fiduciary Standard Rule

Political and ideological divisions on the Securities and Exchange Commission are forcing it to cede leadership on investor protection issues to the Department of Labor (DOL).

That is clear from comments Monday by Kara Stein, a Democratic member of the SEC since 2013, indicating that it will be difficult for the agency to craft its own uniform fiduciary standard. But that should not interfere with the DOL pursuing its own agenda, Stein said.

In comments at an event hosted by the Brookings Institution, Stein said that the “devil is in the details” about an SEC rule on the uniform standard, adding that she has made no commitments in advance to supporting any proposal advanced by Chairman Mary Jo White.

Her comments also imply that industry efforts to stymie the DOL rulemaking by seeking to have the SEC go first on uniform fiduciary standard rulemaking are also likely to fail.

Her comments are consistent with those of Daniel Gallagher, a Republican member of the SEC. He has stated at a number of venues in recent months that he doesn’t believe the SEC will agree to a new uniform standard. Among other concerns, he sees the DOL version of the fiduciary standard making it too costly for brokers and advisers to provide service to the small investors who need it most.

In Stein’s comments, she said White “has publicly talked about this and is moving forward on giving the commissioners a proposal to consider.”

She said her “expectation is that we will be looking at this issue and trying to look at ways to enhance and improve investor protection.”

But, Stein said, the difficulty the SEC is having in crafting a uniform standard is that the issue “is complicated” because of the ways it will affect broker-dealers and investment advisors. She also said the same thing in answering a question about whether she would support an alternative to the DOL proposal advanced last week by the Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Roundtable.

The DOL’s proposal would set a “best interest” standard to all retail investment transactions within retirement accounts. That is the fiduciary standard rather than the suitability standard that broker-dealers and insurance agents operate under.

Stein said she has been looking at the issue “for a long time,” and explained that if had been easy to resolve, Congress would have done so through a law. She also said the answer does not necessarily have to come from one rule or law: “The DOL has been looking at this from an Employee Retirement Income Security Act (ERISA) context, a different context than we are looking at it.”

Stein made her comments at an event where she talked about the 75 years of the Investment Company Act (ICA), and voiced concern that “we are starting to see some cracks in the foundation” of the ICA “that we should all be thinking about.”

The fact that the SEC is having difficulty dealing with investment protection issues was confirmed by several industry lawyers.

For example, the SEC is required to advise the federal government semi-annually of its rulemaking agenda, said Gary Cohen of Carlton Fields, Jorden Burt in Washington. However, when the SEC did so in March, it did not appear to have listed a broker-dealer fiduciary duty rule  --  even in what the SEC calls a “pre-rule stage,” Cohen said.

He added that it is not clear why the SEC did not list the fiduciary rule, especially where the SEC’s rule-making agenda is stated to reflect the priorities of the SEC and Chairman White had said that she favored such a rule.

“If the SEC has a timeline for considering a fiduciary rule, the timeline is internal, because the SEC has not publicly announced a timeline through the federal government’s official channel,” Cohen said.

David G. Tittsworth, a counsel at Ropes & Gray and president and CEO of the Investment Adviser Association for 18 years before his retirement, also agrees that it will difficult for the SEC to take the lead on a uniform fiduciary standard and to even craft a final rule.

“It’s clear that the SEC has been split on the issue,” Tittsworth said,

Tittsworth said Stein’s comments on Monday were the first time “were the first time she has addressed the issue,” but Gallagher has repeatedly said he would not support a uniform standard for broker-dealers.

Tittsworth said action on a uniform fiduciary standard is “somewhere on the chair’s priority list, but where do they find three votes [to approve it] and for what?”

He said the fact that the term of Luis A. Aguilar, ends this month, and Gallagher’s term is also ending “only complicates” the SEC’s ability to craft a rule within a reasonable period of time.

“With the DOL proposal outstanding, and all the activity on Capitol Hill, especially the bill by Rep. Ann Wagner, R-Mo., that would require the SEC to go first, the issue is incredibly controversial.”

Tittsworth also said that President Obama is supporting the DOL proposal. He also said that he agreed with Stein that members of Congress are wrong in seeking the two agencies to act together because there are two different statutory schemes behind the authority of the SEC and the DOL to impose protections of investment products.

“It’s ironic that Congress is seeking to have the two agencies act together, because it was Congress that created the different statutory schemes,” Tittsworth said. “ERISA is very different from the Investor Adviser Act and the Investment Company Act of 1940 act, as well as other securities laws.”

Tittsworth said that “it is unclear whether Congress is going to wade further into the controversy.”

Tittsworth also pointed out that Labor Secretary Thomas Perez has also said “there will absolutely be a rule,” is out for public comment, and Perez has also said there will be public hearings. “So, we have to watch these steps as they transpire.”