The SEC could end up legitimizing the worst current, legal standard of care abuses by broker-dealers, the prime author of the DOL’s fiduciary rule warned.
Obama Administration DOL official Phyllis Borzi, who is considered the mother of the rule, said she is worried the SEC will bow to Wall Street pressure and endorse a "suitability light" standard that permits brokers to hold themselves out as trusted advisors, but holds them liable only as salespeople, not fiduciaries.
“That would legitimize the worst abuses in current law and continue the losses and harms of the current system by allowing individuals to make conflicted sales pitches to unsuspecting consumers with impunity,” said Borzi in an email.
The Commission is scheduled to vote on a proposal to establish a standard of conduct for broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.
The text of the proposal, which is almost certain to be approved by the five-member governing panel, has not been released.
Usually, when an SEC Chair brings a proposed or final rule up for a public vote, he or she is certain it will pass.
An outside investor advocate who insisted on remaining anonymous said late last week it is his understanding SEC Chair Jay Clayton wants the proposal to be just that—a proposal rather than a regulation that cannot be altered.
“(He probably wants to) put lots in the proposal, let people comment widely and then figure out later what he can get the broadest support for among the Commissioners, recognizing that it may end up being an entirely partisan vote at the end," the source said.
In addition to the rule for brokers, the SEC is set to vote on interpretation of the standard of conduct for investment advisers.
The wording of this proposal has not been released either.
Currently broker-dealers are required to give advice and take actions “suitable” for investors while SEC registered investment advisers must put the financial interest investor-clients first, above the advisers’ personal financial gain.
However, the duty owed by advisers has never been detailed by the SEC. It is an obligation established by the courts rather than the Commission.
SEC Chair Clayton has said since the beginning of his tenure last year that a standard of care for brokers and advisers was coming.
This will be the SEC’s first major rule making under Clayton with wide implications for investors.
The proposals are likely designed to clarify the obligations brokers and advisers owe investors and to weaken the DOL’s fiduciary rule.
DOL’s regulation ostensively applies only to retirement fund advisers but there is overlap of professionals covered with both agencies.
Congressional Republicans have repeatedly attempted to void the DOL rule.
The chief argument of the fiduciary rule opponents is that it would make advice more expensive for retail investors and be too cost-prohibitive for some investors to get any personalized recommendations.
But the Obama White House asserted the rule would save investors $17 billion because more money would go into their pockets that would have gone into wallets of advisers from higher-than-what-should-be fees.
Commenting on the rule making, the Investment Adviser Association said a rule that would hold broker-dealers to the same standard as advisers is critical to investor protection.
The trade association for the mutual fund industry, the Investment Company Institute issued a statement that it hopes the Commission will require broker-dealers to act in the best interests of retail investors when making personalized recommendations.
The disclosures made to investors should require the broker to reveal key aspects of its relationship including the scope of services provided, the types of compensation, and any material conflicts of interest, the statement said.
