Fiduciary Rule battle rages on in US, as SEC head vows to ‘work with DOL’ on plan

Ever since the US’s long-awaited Fiduciary Rule partially took effect in June, the matter of whether it should ever be fully implemented – or rather, killed off – has raged on in Washington and elsewhere.

The latest development, earlier this week, took the form of a statement by US Securities and Exchange Commission chairman Jay Clayton that the SEC was moving in the direction of drafting a fiduciary rule “proposal” as it prepared to work in conjunction with the Department of Labor to come up with a final version of fiduciary legislation that would address concerns on both sides of the argument.

The DOL is the agency responsible for the version of the rule that came partially into force in June, and which is currently on hold pending a review ordered by President Trump.

The SEC is in the process of consulting on the matter of the rule, as part of its review.

According to media accounts of Clayton’s comments, which he made during an appearance before the House Financial Services Committee,  the SEC chairman is leaning in the direction of giving investors the choice of using as their adviser, when planning for their retirement and purchasing retirement products, someone who either is or is not bound by the fiduciary rule.

Currently in the US, registered advisers are bound by a 1940-era version of the Fiduciary Rule, which obliges them to disclose any conflicts of interest and put their clients’ interests ahead of their own, when recommending investment products; those who handle retirement products, such as insurance brokers, however, are required to meet a lesser “suitability” standard. The rule he advisers adhere to was set fort in the Investment Advisers Act of 1940.

As reported, in August the final implementation date of the controversial Fiduciary Rule – an Obama-era set of regulations that is at odds with the Republican party and Donald Trump’s anti-regulatory philosophy – was officially moved back, by 18 months, to 1 July, 2019, which was widely seen as a move by the new administration to buy time to significantly revise key elements of it that have been opposed by Republican lawmakers and certain business interests, including some major financial services companies that specialise in retirement products.

Opponents of the law have argued that it’s too complex and would increases the risk of costly litigation, with the likely result that investors with modest retirement accounts would struggle to find brokers willing to provide them with advice, as they wouldn’t be deemed to be worth the trouble and risk.

Those in favour of the Fiduciary Rule argue that the existing model isn’t fair to investors, and results in investors too often being sold products with high fees, and which might have been recommended to them by the broker because he or she would benefit from their sale, not because they were the best product for the investor in question.

One of the side effects of the debate is that many more Americans are aware of the fact of the proposed Fiduciary Rule than were before, and have made clear their belief that they should only be offered products that are in their best interests.

States taking growing interest 

Another by-product of the increasingly public debate is that a number of US states have begun to take an interest in whether their residents are adequately protected by the existing legislation.

Last month, the Wall Street Journal reported that governors of Nevada and Connecticut had “signed bills to expand or amplify ‘fiduciary’ requirements for brokers” operating within their state lines, while “legislators in New York, New Jersey and Massachusetts have introduced similar bills… and several other states, including California, have indicated interest in exploring such requirements”.

Some industry observers, meanwhile, have argued that the logical thing to do would be to extend the relevant provisions of the Investment Advisers Act of 1940, which governs the way US registered advisers sell investment products,  to those selling retirement products. They note that because the Advisers Act is a “principles-based standard” rather than a rules-based one – as the new Fiduciary Standard is currently set out to be – it simpler and more easily-adapted to the marketplace

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is the editor of International Investment. A US-trained journalist, she has worked in Rome, New York City and London, covering everything from the fashion and retailing industries to the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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