How the fiduciary debate between SEC and DoL is shaking out

WASHINGTON – Is the SEC offering an olive branch to the Department of Labor regarding its handling of the controversial fiduciary rule?

In comments at the fall SIFMA conference, SEC Chairman Jay Clayton emphasized the need to respect the Department of Labor's authority. At least one industry watcher saw the gesture as a peace offering amid tough negotiations.

"They have their process. We have our process," he told Wall Street executives. SIFMA has sued unsuccessfully to block the fiduciary rule.

Clayton's remarks come at an uncertain moment for the future of the regulation. The Labor Department has partially delayed implementing aspects of its regulation while the SEC is in the process of considering its own rule.

"He's being respectful of their authority, which has been challenged in the courts," says Denise Valentine, senior analyst at research firm Aite Group.

Valentine adds: "I think he's giving the nod to a peer group that he hopes to work with. That may be the best solution, which is the two of them coming together."

Still, getting the two sides to match up could be challenging, Clayton acknowledged.

"The idea that there is a silver bullet, one account type [or] one relationship type that solves this, is not something we should pursue," Clayton said. "The reason I say that is because you can't deliver everything that everyone wants that way."

The SEC has been authorized to create such a regulation since 2010, but it has yet to do so.

Though Clayton and Secretary of Labor Acosta may want to work together, they'll undoubtedly butt up against barriers. The two agencies are tasked with administering very different laws, says Duane Thompson, senior policy analyst at Fi360.

"For example, state insurance laws do not mandate a fiduciary standard for insurance producers, only a suitability standard, and only for certain insurance products. The fiduciary standards under the administration of the SEC and DOL also vary considerably. In other words, there is no one-size-fits-all fiduciary standard in the marketplace," Thompson says.

He adds that the process could take longer than the 18-month implementation delay the Labor Department has proposed for the remaining elements of the fiduciary rule.

Zach Gibson/Bloomberg

BATTLE LINES

The Labor Department could recognize an SEC rule as providing an exemption under ERISA, which grants the department authority to oversee retirement assets, says Barbara Roper, director of Investor Protection at the Consumer Federation of America, which has advocated for a strong fiduciary standard. Expectations are that they will adopt such an approach.

"That means, of course, that the Secretary of Labor has to find that the SEC rule adequately protects plans, plan participants and IRA investors, in keeping with the standards in ERISA," she says. "Under the circumstances, it is going to be hard to justify deferring to a weaker rule where the conflicts are greatest, and they’d be on shaky legal grounds if they tried. That could create an incentive to adopt a more stringent rule than they might otherwise contemplate under the ’34 Act."

Although Clayton called for regulatory consistency across client accounts, he didn't drop hints as to how regulators might get there.

"I believe the SEC has the authority and expertise to be a leader in this space. But the DoL has its authority and so do the states," he said, nodding to nascent efforts by states such as Nevada to craft their own fiduciary standards.

That latter movement is complicating regulatory coordination while also stymieing fiduciary critics' bid to roll back the rule.

Fiduciary advocates, meanwhile, are unrelenting in their efforts to preserve what they see as a necessary investor protection. Still, critics appear to have the momentum on their side, given the Trump administration's overall push toward deregulation.

Indeed, that theme was ever-present at the conference, with multiple speakers alluding to it.

"I don't think there is any doubt that, as well-meaning as they might have been, that our current regulations have stifled growth and capital formation," Warren Stephens, CEO of investment bank Stephens, said during a talk about financial markets and his work to tout capitalism's benefits.

Timothy Scheve, CEO of Janney Montgomery Scott, repeated criticism that the fiduciary rule, though "well-intended," was driving up costs and restricting client choice.

He applauded SIFMA "for remaining focused on this rule and what is at stake."

The industry trade group has sued the Labor Department along with other business groups to block the fiduciary rule from going into effect. On Tuesday, SIFMA repeated its call for a uniform regulatory standard.

"SIFMA has long supported a best interest standard for brokers, for all accounts where advice is provided, established under the federal securities laws," a spokeswoman for the trade group said.

SIFMA's conference drew several regulators, including FINRA CEO Robert Cook. He did not take questions from reporters on the regulator's stance on a fiduciary standard or how an SEC standard, which would presumably apply to brokers and advisors across all types of client accounts, might affect FINRA's operations.

A FINRA spokeswoman was not immediately available for additional comment.

Clayton wasn't the first SEC chair to speak at SIFMA's annual conference. His predecessor, Chairwoman Mary Jo White, spoke at the Wall Street trade group's conference multiple times. Both White and Clayton made similar comments about prioritizing a fiduciary rule, while noting that it's a complicated process.

While head of the SEC, White cited the enormous task list the agency had under Dodd-Frank in addition to divisions among commissioners over the fiduciary rule.