SEC advice rule falls short on investor protection, lawmaker asserts
Rep. Stephen Lynch notes Dodd-Frank provision authorizing SEC to impose uniform standard 'no less stringent' than fiduciary duty.
A Democratic lawmaker asserted to a Securities and Exchange Commission official Wednesday that the agency’s investment advice reform proposal falls short of the investor protections required by the Dodd-Frank financial reform law.
In a congressional hearing, Rep. Stephen Lynch, D-Mass., focused on the Dodd-Frank provision that authorized the SEC to impose a uniform standard of care for retail investment advice that is “no less stringent” than the fiduciary duty that currently governs investment advisers.
The SEC proposal maintains separate regulation for advisers and brokers, but includes a so-called Regulation Best Interest that is designed to strengthen the broker standard by requiring them to emphasize their clients’ returns over their own compensation.
But Mr. Lynch told SEC Division of Investment Management director Dalia Blass that the SEC proposal is weaker than a fiduciary duty.
“There’s still statutory language that insists that the standard be no less stringent,” Mr. Lynch said during a hearing of the House Financial Services Subcommittee on Capital Markets, Securities and Investments. “I think that in having a best-interest standard, which is clearly less exacting than the fiduciary standard, we failed to meet that obligation that’s set forward in the Dodd-Frank Act. Do you concede that that’s a gap now? That there’s a delta between what we were hoping for in Dodd-Frank and what we’re receiving now under the SEC’s rule?”
Ms. Blass said the SEC’s proposal for brokers and the fiduciary standard share the same characteristics. She said that under both, financial advisers must act in the best interests of their customers.
“The core principles are the same,” Ms. Blass said. “They were tailored in Regulation Best Interest to apply to the broker-dealer model.”
The SEC drew not only from the adviser standard of care but also from the impartial conduct standards included in the Labor Department’s fiduciary rule, according to Ms. Blass.
The DOL measure partially went into effect in 2017 but was vacated earlier this year by the 5th Circuit Court of Appeals.
Ms. Blass said the SEC saw a reduction in commission-based accounts when the DOL rule was operating.
“That impacted the choices of investors,” Ms. Blass said. “We tailored [the SEC proposal] to preserve that choice for the retail investors.”
The concerns voiced by Mr. Lynch reflect those expressed by investor advocates, who contend that the SEC proposal preserves the status quo for brokers. They are currently held to a suitability standard.
Ms. Blass’ emphasis on investor choice echoes the rhetoric used by financial industry opponents of the DOL rule, who said it would undermine the brokerage business model.
Last week, SEC chairman Jay Clayton declined to say when the commission would issue a final advice reform rule. The agency has received more than 6,000 comment letters.
“We’re in the process of going through those comments to see what changes, if any, we should be recommending up to the commission,” Ms. Blass said.
Learn more about reprints and licensing for this article.
