Two years into her term, the financial advice industry's chief regulator finally showed her hand last week in support of a uniform fiduciary standard. Now the clock starts ticking on making it a reality.
Mary Jo White, chairwoman of the Securities and Exchange Commission, stepped into an already fierce debate between Wall Street and the White House over a related rule the Labor Department is considering for advice on retirement accounts.
Ms. White's long-awaited stance on a fiduciary duty for all retail investment advice was fundamental to starting the discussion at a currently split commission. But there's a long road ahead, and it's uncertain whether Ms. White's tenure will last the journey.
“Even if they were ready to pull the switch today — and they're nowhere near that — as a technical matter, it takes a substantial period of time,” said Robert Kurucza, a partner at Goodwin Procter and a former associate director of the SEC's Division of Investment Management. “It doesn't happen overnight.”
Even in the most favorable environment, the rulemaking process can take more than a year. The challenges facing Ms. White range from the timeline to produce a rule — the new president who will be elected in 15 months may want to appoint his or her own SEC chief — to the competing interests that will parse every nuance of a proposed rule and push back hard if some detail is not to their liking.
Ms. White was clear about her position in remarks to a Securities Industry and Financial Markets Association meeting in Phoenix last Tuesday. She said the SEC should “implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor.”
The financial industry has been watching closely for Ms. White's position, which breaks a standoff between the two Democratic commissioners (who support a rule) and two Republican commissioners (who oppose it) on the five-person panel. Ms. White said she will begin talking with the other commissioners about the outlines of the new rule.
“Getting the balance right is absolutely essential,” she said.
The Dodd-Frank financial reform law gave the SEC the authority to promulgate such a rule, which would force everyone providing retail investment advice to act in the best interest of their clients.
"A BREAKTHROUGH'
Advocates for strengthening investment advice standards hailed Ms. White for indicating the agency would pursue raising the bar for brokers.
“I think it was a breakthrough,” said Karen Barr, president and chief executive of the Investment Adviser Association. “She hadn't quite stated as clearly as [she did last Tuesday] what her own view on the subject was.”
Ms. White had been promising since November to reveal her position on a fiduciary duty.
“It confirms what she's indicated in private — that she thinks this is an important issue and one the commission should take up,” said Barbara Roper, director of investor protection at the Consumer Federation of America.
The statement by Ms. White means the SEC will tackle a fiduciary standard for retail investment advice while the Department of Labor proposes a separate rule for brokers giving advice regarding retirement accounts. Ms. White reiterated at the SIFMA conference that the DOL and SEC can pursue separate rules because they operate under different laws.
Ms. White is in a position to be a stalwart for fiduciary duty, said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.
“We think her statement is an indication that she will take a leadership role in advancing a fiduciary standard under Dodd-Frank,” Ms. Mohrman-Gillis said. “The Financial Planning Coalition is grateful that she is making this a priority, and she has our full support.”
The coalition is comprised of the CFP Board, the Financial Planning Association and the National Association of Personal Financial Advisors.
Investment advisers already meet the best-interest standard. Brokers adhere to a suitability rule that requires them to sell investment products that meet a client's needs but may include higher fees than other products available, for example.
Proponents of a fiduciary duty say it is a critical investor protection.
LIABILITY COSTS
Skeptics worry it will sharply increase regulatory and liability costs for brokers, which would limit their ability to work with lower-income people. They also assert that the suitability standard works well.
“We want to take a look at what the SEC comes up with and judge it based on what we think the impact might be on mid-market consumers,” said Gary Sanders, vice president at the National Association of Insurance and Financial Advisors. “Our members have a relationship-based business model. As a practical matter, [they] are already looking out for their clients' best interests.”
Groups that attack the DOL fiduciary rule, such as NAIFA and the Financial Services Institute, a lobbying group for independent broker-dealers and advisers, tend to be more restrained about an SEC rule.
That's partly because the SEC's work would be done under the congressional authorization in Dodd-Frank, which has protections for the broker business model, such as allowing brokers to charge commissions and sell proprietary products and limiting the timeframe for a continuing duty of care. The DOL, on the other hand, is portrayed as going off on its own.
The fact that Ms. White is pushing ahead with the fiduciary-duty rule nearly two years after she took office is comforting to FSI, which vocally opposes the DOL rule. The group said it showed Ms. White didn't want to rush into rulemaking.
“This is an encouraging start,” said David Bellaire, FSI executive vice president and general counsel. “We appreciate her careful and measured approach to an important and complex issue.”
The agency also benefits from the fact that brokers dually registered as investment advisers already adhere to a best-interest standard and won't be shocked if a uniform rule is implemented, said Duane Thompson, senior policy analyst for Fi360, a fiduciary duty training company.
“It's doable,” Mr. Thompson said. “It's not going to be a walk in the park for Chair White. But I don't see it on the same scale of [industry] opposition that we've seen on the DOL fiduciary-duty rule.”
Ms. White did not give a timeline for when the commission would propose a rule. She said the next step would be to have in-depth conversations with the four other SEC commissioners. Republican members Daniel Gallagher Jr. and Michael Piwowar have said the agency should not advance a fiduciary-duty proposal.
STRONGER RULE
But that opposition actually frees Ms. White to work with the two Democratic commissioners to formulate a “strong pro-investor rule,” Ms. Roper said.
The Republican members have “made it clear that it's fruitless to negotiate with them,” Ms. Roper said. “I think she has three votes for a good rule.”
Mr. Piwowar could not be reached for comment. Mr. Gallagher's office did not respond to a request for comment.
The agency has to address the complexities of how to implement the rule and enforce it, Ms. White said.
Some fiduciary advocates have expressed concern that the SEC will water down the existing fiduciary standard. But Ms. Barr said the SEC chairwoman doesn't seem to be going in that direction.
“I was pleased that she used the term "principles-based' in her remarks, and that the duty would be based on the Investment Advisers Act duty,” Ms. Barr said. “But, obviously, the devil's in the details.”
Bloomberg News contributed to this story.
mschoeff@investmentnews.com Twitter: @markschoeff
