Larry Stadulis is a partner at Stradley and Ronon; he has been with the firm for 13 years after working previously for Morgan, Lewis & Bockius. Fresh out of law school he worked more than four years at the Securities and Exchange Commission (SEC).
Today, Stadulis’ practice involves mainly representing investment advisers and broker/dealers, as well as pooled fund vehicles. Primarily he focuses on “the areas that involve the interstices of regulation between advisers, brokers, retirement plans and others types of products and services that involve fiduciary and suitability issues.”
It’s quite a relevant background in the current investment industry environment, wherein, as Stadulis explains, “it is very easy to imagine how complicating, shifting, overlapping regulatory issues can fall between the cracks.” When it comes to the possibility of a uniform advice standard for advisers and brokers coming out from the SEC in the near term, he “feels things are still very much in a wait-and-see mode,” despite increased chatter about the possibility among lobbying organizations and in the financial trade media. Much of the conversation has centered on mere speculation following the appointment of Jay Clayton as SEC chair by the Trump administration, Stadulis argues.
“From my perspective, I don’t really think there is much hard news we can go on in terms of what the SEC may be planning for the next couple of years as it pertains to conflicts of interest and coordinating with the Department of Labor (DOL) fiduciary reforms,” Stadulis opines. “Having said that, the industry is clearly evolving towards a new compensation structure—centered on asset-based compensation rather than commissions. Regardless of what the DOL and SEC are doing, or whether they are eventually able to work together more closely, this shift is already happening and is unlikely to stall.”
At the same time, Stadulis continues to hear regularly from clients about some core concerns, especially when it comes to smaller firms facing the DOL reforms. Many are committed to the new fiduciary future—but they are finding it difficult to source the time and personnel needed to shift their firm’s product delivery and compensation practices as demanded by the conflict of interest reforms. Full implementation of the DOL fiduciary rule may be delayed, but there is still very real pressure on firms to update their compensation and service strategies.
“It’s not as easy for smaller firms to shift their compensation models,” Stadulis argues. “I’m not saying it is easy for larger firms by any means, but they more often have the resources available to confront a constitutional challenge like this. For both sides of the market, there is no going back.”
Turning to the technical side of this debate, Stadulis commends the motivation behind strengthening conflict of interest rules, both at DOL or SEC, but he argues it will be “more difficult than a lot of people think for the SEC to effectively insert itself into the DOL’s own ongoing fiduciary efforts.”
“The SEC frankly is in a difficult position because of the source of its authority in the statues,” Stadulis explains. “Brokers registered with the SEC have their own distinct set of duties, and in a way these duties are ‘fiduciary’ in their own nature, but I think it’s difficult to see how we could fit a single standard around all advisers and all brokers. This would mean making all brokers into advisers, and that is simply a really difficult situation to picture. The point I’m trying to make is that the SEC is struggling to see a path forward because the responsibilities and duties of advisers and brokers have been somewhat different for a long time.”
Stadulis says he expects DOL and SEC will find some limited ways to work together as they shift and tweak their respective requirements for various types of financial services professionals, but a true uniform standard across all types of advisers and brokers is unlikely: “We may reach a juncture where DOL and SEC agree to come up with a solution that imposes different-but-comparable standards on both advisers and brokers while at the same time recognizing, validating and emphasizing the important differences between the two industries.”
Signals from inside the beltway are mixed
As noted by George Michael Gerstein, counsel with Stradley Ronon working closely with Stadulis on these issues, SEC Chair Clayton has confirmed to Congress that he is “dedicating significant staff resources to the very challenges we are currently discussion.”
“From what I have seen of the two of them, it seems SEC Chair Clayton and DOL Secretary Alexander Acosta have a similar, complementary outlook on these matters, and they are willing to work together,” Gerstein says. “I agree it is a real challenge that they face, but they appear to be in sync for the most part about finding a solution.”
Like Stadulis, Gerstein agrees that it will be difficult for the SEC to suddenly step up and take the lead role in the fiduciary reform conversation—or even for the regulator to take a more even role next to DOL.
“Clayton has confirmed on the record that he does not believe the SEC should have exclusive jurisdiction here over policing conflicts of interest among advisers and brokers,” Gerstein says. “He apparently feels strongly that the DOL is rightfully enacting its own authority over retirement assets under the Employee Retirement Income Security Act (ERISA). Clayton appreciates that Congress went out of its way in 1974 to give DOL jurisdiction here.”
Stadulis agrees with that assessment, adding that there is another entirely distinct regulator that also has some skin in this game—and that is FINRA. In addition, more states are following the example set by Nevada and are attempting to craft their own local conflict of interest rules to add to the protections already in place.
“What does best interest ultimately come to mean? It depends on whether you’re looking at DOL’s standards versus the SEC versus FINRA’s own interpretation of suitability rules,” Stadulis concludes. “The standard in the end is going to have to be some amalgamation of the interests of all of these stakeholders. They all want to ensure a strong regulatory system remains in place that promotes client’s best interest while also making sure not to over-burden advisers and brokers.”