Securities and Exchange Commission Could Establish Uniform Fiduciary Standards of Conduct Applicable to Investment Advisors and Broker-Dealers

By Elaine Wood

The Obama Labor Department aimed to protect investors—particularly those with retirement accounts—from nefarious brokers motivated by high commissions and a misguided confidence in the fact that standards of conduct applicable to “investment advisers” in the securities industry did not apply to “brokers.”

Enter a new twist on the Employee Retirement Income Security Act of 1974 (ERISA). The Fiduciary Duty Rule requires brokers as well as investment advisors (or any person making a recommendation or solicitation) in a retirement account (such as an IRA or 401k account) to “adhere to basic standards of impartial conduct, prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.” Prior to the Fiduciary Duty Rule, brokers generally did not owe a fiduciary duty to their customers, even in retirement accounts. As the Fiduciary Duty Rule came into being, forecasters predicted the Icarusian plummet of brokers’ hubris.

President Trump’s directive ultimately delayed the applicability date of the DOL’s Fiduciary Rule to June 9, 2017. Prior to the rule’s proposed implementation, President Trump issued a memorandum in February instructing the Secretary of Labor to “prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule.” On May 22, the Department of Labor and Department of Treasury issued formal non-enforcement policy statements regarding the Fiduciary Rule. Opponents to the Fiduciary Rule argue that it restricts individual freedoms to make financial decisions. Proponents emphasize its measures to protect the retirement assets of vulnerable customers.

By applying the Fiduciary Duty Rule, “[t]he Department of Labor has done what the Securities and Exchange Commission is unable to do: create an enforceable best-interest standard and reign in conflicts that aren’t in the best interest of the investor,” said Barbara Roper, director of investor protection at the Washington, D.C.-based Consumer Federation of America.

Unable to do? That may soon be in the past. The SEC’s recent solicitation of public data and comment letters signals a massive effort to reevaluate its current regulatory standards-of-conduct practices for members of the securities industry. The public forum takes seriously the merits of establishing uniform fiduciary standards of conduct: a “best interests standard of conduct” for all investors, not just retirement investors. Not only could the Commission establish uniform fiduciary standards of conduct applicable to investment advisers and broker-dealers, it could standardize practices applicable to anyone who gives “investment advice.” With this invitation for public comment, the SEC has shown that the universal fiduciary standard is not dead and may yet become the industry standard for all investment advice.