The SEC’s Back In the Fiduciary Regulation “Game”

The SEC announced its plans to move “from the sideline” on fiduciary regulations on June 1, 2017.  That day, SEC Chairman Jay Clayton issued a statement referencing U.S. Department of Labor Secretary Alexander Acosta’s call for SEC participation and stated that he “look[ed] forward to robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.” This represented the SEC’s first serious foray back into this area since a rule finalized in April 2005 entitled “Certain Broker-Dealers Deemed Not To Be Investment Advisers” that added Rule 202(a)(11)-1 to the Investment Advisers Act of 1940.  That rule was short-lived and was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2007.

In his June 1 announcement, Chairman Clayton further advised that as part of the SEC’s examination of the standards of conduct for investment advisers and broker-dealers, and related matters, the SEC is seeking public comments on a list of issues to inform “possible future actions” by the SEC on fiduciary duty rulemaking.

Chairman Clayton stated that the Fiduciary Rule “may have significant effects on retail investors and entities regulated by the SEC,” as well as “broader effects on our capital markets. Many of these matters fall within the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” Chairman Clayton said that the SEC “has been reviewing this [fiduciary] area for some time,” but “significant developments in the marketplace” have occurred since “the RAND study of investor perspectives [was] commissioned in 2006, the Dodd-Frank Act Section 913 staff study conducted in 2010-2011, and, most recently, a solicitation of data and other information in 2013.”

Coordination with DOL and the SEC’s motivation

Following the U.S. Court of Appeals for the D.C. Circuit’s decision to vacate the 2005 Rule 202(a)(11)-1 on the grounds that the SEC had exceeded its authority under the Administrative Procedure Act (see Financial Planning Association v. SEC, 482 F.3d 481), the SEC has watched the DOL take command in this area, until now.

In one of his only speeches since issuing the June 1, 2017 public statement described above, Chairman Clayton took the opportunity to address his views on coordination with the DOL:  “With the Department of Labor’s Fiduciary Rule now partially in effect, it is important that the Commission make all reasonable efforts to bring clarity and consistency to this area.  It is my hope that we can act in concert with our colleagues at the Department of Labor in a way that best serves the long-term interests of Mr. and Ms. 401(k).”

Striking a more hawkish posture, in response to the DOL’s “Request for Information” related to the Fiduciary Rule, on July 25, 2017, SEC Commissioner Michael Piwowar filed a public comment letter with the DOL “encourag[ing] the Department of Labor to reconsider this misguided rulemaking.”  Regardless of Commissioner Piwowar’s aggressive views, in his recent testimony before the House Committee on Financial Services on October 4, 2017, Chairman Clayton advised, “Specifically, our standards should be clear and comprehensible to the average investor, consistent across retirement and non-retirement assets and coordinated with other regulatory entities, including the DOL and state insurance regulators.”

While skeptics question the SEC’s motivation and wonder aloud whether the SEC will attempt to minimize fiduciary regulations, Chairman Clayton repeatedly advises that the SEC is going to work with the DOL. At this point, the next step for the SEC, after the confirmations of the two Commissioner-Nominees, will likely be a proposed rulemaking.

We will continue to monitor and advise regarding the ongoing developments with the SEC leaving the sidelines to get back into the game.

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About the Author: Jamie L. Helman

Jamie L. Helman concentrates her practice on securities, broker-dealer arbitration, litigation, mediation, employment matters, and regulatory defense. She has experience first-chairing FINRA arbitrations, defended on-the-record testimony of broker-dealer employees before FINRA, and is presently involved in the representation of broker-dealers in several pending FINRA cases as well as regulatory matters.

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