After many years of study and internal debate, the Securities and Exchange Commission is set to make a momentous advance Wednesday in setting investment advice standards.
The five-member SEC is scheduled to vote Wednesday afternoon on whether to
propose a rule package consisting of a disclosure document for registered investment advisers and brokers that summarizes their relationship with investors, a rule that sets a broker advice standard, and an "interpretation" of the standard of conduct for investment advisers.
The fact that the package will see the light of day marks a significant milestone for an agency that has been wrestling with the advice issue for decades, and was given authority to propose a rule nearly eight years ago by the Dodd-Frank financial reform law.
"Chairman Clayton is poised to do what none of his predecessors has done, which is get a proposal out the door," said Barbara Roper, director of investor protection at the Consumer Federation of America. "If he can do that with bipartisan support, more power to him."
The SEC has been hamstrung because of disagreements among its members. They usually split along party lines, with the Republicans questioning the need for an advice regulation and Democrats supporting one.
But
Wednesday's meeting is just the first step in the rulemaking process. The agency will not reach the end of the road but rather likely will set off on another difficult journey that could continue into next year.
And don't get too excited if there's a 5-0 vote to advance a proposal.
"Commissioners might be willing to vote to propose a rule they feel is inadequate if they think they can negotiate changes before the rule is finalized," Ms. Roper said.
Parsing the fault lines among commissioners will require listening carefully to the discussion Wednesday. I will be there, covering the event as it happens, and
InvestmentNews will send out alerts for each salient revelation during the commissioners' debate of the proposal. It will sort of be like following a Supreme Court oral argument to divine the outcome the court will eventually reach.
Some of the tension may be diffused by how the rule package is constructed.
Scott Kimpel, a partner at Hunton Andrews Kurth, anticipates that each part of the package will consist of a set of alternative approaches on which the commission will seek comments. The comment period could last for 60 to 90 days.
"I don't think the commission would get behind a single proposal at this stage," said Mr. Kimpel, who was counsel to former SEC member Troy Paredes. "There's a lot of opportunity to find common ground through a public comment process."
Mr. Paredes was one of the Republican commissioners in 2011 who dissented from an SEC staff report calling on the agency to propose a uniform fiduciary standard for retail investment advice.
Under such an approach, brokers, who currently meet a suitability standard, would have to meet the same requirements as investment advisers, who already are fiduciaries and must act in the best interests of their clients.
But
advisers and brokers likely will stay separated in the new SEC proposal.
"It appears that the SEC may stop a bit short of requiring everyone to adhere to a true and broad-based fiduciary model," Jamie Hopkins, co-director of the retirement-income program at the American College of Financial Services, wrote in an analysis Monday.
The broker-adviser tension has been the consistent sticking point on reform.
"What has been tricky over the years is how to calibrate where [the commissioners] are going to land," Mr. Kimpel said. "That's probably where the fight will be going forward."
One thing unifying the commissioners could be that they're trying to catch up with — and overtake — the Labor Department's fiduciary rule, which has been
partially implemented but was
vacated last month by the Fifth Circuit Court of Appeals.
That regulation is undergoing a review mandated by President Donald J. Trump that could lead to major revisions. The SEC is in a position to take over on advice standards.
Cliff Kirsch, a partner at Eversheds Sutherland and a former assistant director of the SEC's Division of Investment Management, credits arriving at this point to "the timing of the DOL rule and the chairman's effectiveness. The timing is right for the SEC to act."
SEC commissioner Hester Peirce is ready to get to work on advice standards.
"I'm happy he's made it a priority," she said of Mr. Clayton.
After Wednesday, we'll see if he can keep his fellow commissioners together all the way through a final rule.
Follow
InvestmentNews' coverage Wednesday, which will include ongoing dispatches from the SEC open meeting, as well as adviser reaction and a deep analysis of the proposal, as it becomes available.
