July 21 not only marks the one year anniversary of the passage of the Dodd-Frank Act, but it's also the date when the Securities and Exchange Commission (SEC) will turn its attention to crafting a fiduciary duty rule for brokers.
What's the chance the SEC will not issue a fiduciary duty rule? There's about a "one in one hundred chance [the SEC] does nothing," said John Taft, CEO of RBC Wealth Management, during comments at the Securities Industry Financial Markets Association's (SIFMA) Dodd-Frank Impact Analysis conference on Wednesday.
Taft, who also serves as chairman of SIFMA, was part of a panel discussion exploring Dodd-Frank's impact on the individual investor, which primarily focused on the fiduciary duty rule for brokers that was mandated under Section 913 of Dodd-Frank and which SEC Chairman Mary Schapiro (left) has said the agency will begin writing after July 21.
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The panelists–which included Taft; Charles Johnston, Vice Chairman of Morgan Stanley Smith Barney; Kathleen Murphy president of Personal Investing at Fidelity Investments; and Ben Plotkin, executive VP of Stifel Financial—made educated guesses as to what the final fiduciary duty rule will look like.
Taft said it's important to note that the '40 Act fiduciary standard that advisors must adhere to applies specifically to "discretionary investment advice." If the SEC, he said, decides to "write a rule that imposes a fiduciary rule that [applies] to all personalized investment advice," the agency will have to consider how to apply that fiduciary rule to activities that go beyond discretionary investment management—and into brokers' suitability realm.
"A new [fiduciary] standard is what's needed," Taft said. "Rules that don't exist today need to be written to understand how to apply that fiduciary standard to brokerage activities—which are many, varied and almost impossible to describe."
Johnston of Morgan Stanley added that the SEC "must define" personalized investment services. He said that the '40 Act fiduciary standard is "unworkable" for brokers, and that he believes regulators are "moving away" from applying that standard to brokers. However, he said, "there will be trade-offs" in terms of the types of disclosures that brokers will have to adhere to.
Johnston conceded that regulators—including the Department of Labor (DOL)—have a "tough job" in crafting a fiduciary standard for brokers and under the Employee Retirement Income Security Act (ERISA). "I give [regulators] a lot of credit because they've done a lot of listening. They get it and understand the issues."
But Murphy with Fidelity added careful attention will have to made to how DOL and SEC craft their fiduciary rules, as there's "no question that one impacts the other." Any potential conflicts in the two agencies' standards "have to be straightened out."
On top of dealing with a new fiduciary mandate, and "potentially conflicting standards" in the DOL and SEC fiduciary rules, Murphy said, the Financial Industry Regulatory Authority (FINRA) "has put in place new suitability standards."
Until the final fiduciary proposals are aired, all of the panelists agreed that a lot of uncertainty remains. Johnston with Morgan Stanley noted that because there are "so many uncertainties" surrounding a final fiduciary duty rule, it's hard to prepare advisors for new guidelines. "There will just be a lot of hard work when [a final rule] comes out," he said, and Morgan Stanley will have to "educate clients and advisors on how to work within the new rules."
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Melanie Waddell
Melanie is senior editor and Washington bureau chief of ThinkAdvisor. Her ThinkAdvisor coverage zeros in on how politics, policy, legislation and regulations affect the investment advisory space. Melanie’s coverage has been cited in various lawmakers’ reports, letters and bills, and in the Labor Department’s fiduciary rule in 2024. In 2019, Melanie received an Honorable Mention, Range of Work by a Single Author award from @Folio. Melanie joined Investment Advisor magazine as New York bureau chief in 2000. She has been a columnist since 2002. She started her career in Washington in 1994, covering financial issues at American Banker. Since 1997, Melanie has been covering investment-related issues, holding senior editorial positions at American Banker publications in both Washington and New York. Briefly, she was content chief for Internet Capital Group’s EFinancialWorld in New York and wrote freelance articles for Institutional Investor. Melanie holds a bachelor’s degree in English from Towson University. She interned at The Baltimore Sun and its suburban edition.
