SEC Signals Start of Formal Broker Fiduciary Rule Examination

Nearly a month after an appellate court unexpectedly quashed the DOL fiduciary rule expansion, the Securities and Exchange Commission has announced a date and time for its first formal meeting on the topic.

Back in mid-March, the United States Court of Appeals for the Fifth Circuit ruled, by a two-to-one majority, to vacate the Department of Labor (DOL) Fiduciary rule expansion, based on arguments put forward by the U.S Chamber of Commerce and the Securities Industries and Financial Markets Association.

That decision caught many retirement industry professionals and trade media analysts more or less completely by surprise, coming as it did on the heels of numerous district court victories for DOL, as well as a narrower appellate decision in the Tenth Circuit, which seemed to solidify the standing of certain aspects of the DOL fiduciary rule expansion.

However, the Fifth Circuit decision was far broader in scope and cut directly against the DOL’s authority to established a new fiduciary rule, and so, at his juncture, real uncertainty hangs over the future of a DOL-driven fiduciary rule expansion. Against this backdrop, some analysts have argued the door has been opened for the U.S. Securities and Exchange Commission (SEC) to step in and take the reins from DOL leadership—using authority derived from the post-financial crisis Dodd-Frank Act to drive an even broader approach to establishing a stronger system to prevent, disclose and address brokers’ and advisers’ potential conflicts of interest. And judging by a new SEC announcement that it will soon hold a formal hearing on this topic, it does appear that SEC leadership under President Trump is at least willing to consider doing so.

As laid out on the SEC website, pursuant to the provisions of the Government in the Sunshine Act, SEC will hold an open meeting on this subject on Wednesday, April 18, 2018, at 3:30 p.m. The meeting will be held in Auditorium LL-002 at the Commission’s headquarters, 100 F Street, NE, Washington, DC 20549. Importantly, the meeting will be webcast on the Commission’s website at

The subject matters of the open meeting will be the SEC’s consideration of “whether to propose new and amended rules and forms to require registered investment advisers and registered broker/dealers to provide a brief relationship summary to retail investors; whether to propose a rule to establish a standard of conduct for broker/dealers and natural persons who are associated persons of a broker/dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer; and whether to propose a SEC interpretation of the standard of conduct for investment advisers.”

SEC and DOL observers have frequently told PLANADVISER in recent years that the SEC would likely have a direct role to play in any successful fiduciary rule expansion; their basic argument has been that the SEC holds inherently broader authority than the DOL to police the behavior of financial advisers and broker/dealers, given that the DOL’s jurisdiction over these matters is tied to provisions of the Employee Retirement Income Security Act (ERISA) rather than its original statutory authority.

As noted by George Michael Gerstein, counsel with Stradley Ronon working on these issues (and recently promoted to co-lead the firm’s new fiduciary governance group), SEC Chair Jay Clayton has previously confirmed to Congress that he is “dedicating significant staff resources to the very challenges we are currently discussing.”

“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.”

Gerstein’s co-chair on the fiduciary governance group, Larry Stadulis, argues the SEC may have more inherent authority to regulate these matters, but he points out that the effort still won’t be easy. “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 still think it’s difficult to see how we could fit a single standard around all advisers and all brokers,” he tells PLANADVISER. “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 also likely 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 still in some sense 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.”

Brendan McGarry, an attorney at Kaufman Dolowich and Voluck who represents securities broker/dealers and registered investment advisers in litigation and regulatory matters, also shared some initial thoughts. He says the SEC, from his vantage point, appears to be considering requiring broker/dealers to provide “what may eventually look like a simplified version of Form ADV, Part 2a, to their clients.”

“The content of such a disclosure remains to be seen,” McGarry explains, “but it appears the SEC may address purported concerns that broker/dealers and their associated persons, and their respective duties to their customers, may not always be fully understood by their customers. The SEC appears to be considering a uniform standard for broker/dealers and their associated persons in dealing with all retail customers, not just retirement investors. In addition, they appear to be considering addressing whether and how the standard for investment advisers, commonly thought of as fiduciary in nature, comports with the standard enumerated in the DOL’s fiduciary rule, commonly interpreted as best interest.”