As the Securities and Exchange Commission begins to field comments on how the agency should regulate broker-dealers’ conflicts of interests, one of the country’s foremost fiduciary advocacies is urging a simpler alternative to new rulemaking: Enforce the laws on the books before crafting a uniform fiduciary standard.

CFA Institute, which charters fiduciaries around the globe, is hoping the SEC will revisit its enforcement policy of section 208(c) of the Investment Advisers Act before attempting to draft a uniform fiduciary standard, a process that undoubtedly will be drawn out and contentious, even if executed efficiently.

An ardent supporter of a fiduciary standard for anyone providing investment advice to retail investors, the Institute staked a position unique to the thousands of stakeholders on both sides of the debate throughout the rulemaking process for the Labor Department’s fiduciary rule.

Like countless opponents of Labor’s rule in industry and on Capitol Hill, CFA Institute has long advocated for the SEC to take the lead in crafting a fiduciary standard.

But unlike those opponents, it expressed “great concern” when Labor proposed delaying the rule in March.

“We believe further delay without an SEC rule in place will void meaningful protections for the interests of the vast and, in many cases, vulnerable sector of retirement investors, and would be a regrettable step backwards for the investing public, in general,” CFA Institute wrote in its comment letter before Labor ultimately delayed the implementation of a best-interest standard of care to June 9.

In opposing the delay, the Institute distinguished itself from the rule’s proponents, saying its support of the rule was “tempered by our concerns about its complexity.”

Labor Sec. Acosta calls for SEC input

To the chagrin of the rule’s opponents, Labor Secretary Alexander Acosta said in a Wall Street Journal op-ed he did not have the legal authority to delay the June 9 implementation of the fiduciary rule’s impartial conduct standards.

He also called on input from the SEC as Labor advances its review of the rule, ordered by President Trump.

To that end, SEC Chair Jay Clayton issued a request for comments in advance of any formal rulemaking process the SEC may undertake crafting its own fiduciary standard.

Jim Allen, head of capital markets policy at CFA Institute, says enforcing the Advisers Act in the immediate is the most pragmatic approach the SEC could take to protecting investors from conflicted advice.

“It will be extremely hard for the SEC to write a fiduciary standard that cuts across all sectors of the industry and permits activities that investors want,” Allen told BenefitsPRO.

The need to weave attending carve-outs, exemptions, and enforcement provisions in a way that protects investor choice would invariably lead to the type of complexity that CFA Institute is critical of in Labor’s rule.

“You’d end up with a rule with a bunch of holes in it--the size of the old New York City telephone book looking like Swiss cheese,” said Allen.

As an advocate for a fiduciary standard of care on all who provide investment advice, Allen and CFA Institute are nonetheless respectful of the role brokers serve as sales representatives in the investment market.

The problem for retail investors, says Allen, is when brokers put themselves out as advisors, something the Investment Advisers Act intended to deter.

Section 208 (c) of that Act prohibits any person from claiming to provide “investment counsel” unless they are a registered investment advisor, or a fiduciary as defined under the law.

Over the past decade, more brokers began offering some clients fee-based sales models, something Allen says the SEC encouraged. “Once brokers did that, they started calling themselves advisers. The SEC let them go along with that.”

In reestablishing, and enforcing, the titling distinction established in the Advisers Act, the SEC could go a long way to addressing widespread investor confusion as to whether or not representatives are required to put investors’ best interest first.

That would stem potential conflicts of interest relatively immediately, says Allen.

“All we are saying is ‘let’s take care of the titling problem first.’ We think that would address a significant part of the problem. It’s perfectly fine for brokers to sell investors products. But when they call themselves advisers, that is confusing the issue,” said Allen.

“If you know the person on the other side of the table is a sales person, at least the investor starts off with a fighting chance,” he added.

A six-month fix?

By some counts, for more than a decade the SEC has been mulling a fiduciary standard and the implications of investors’ inability to distinguish fiduciaries from sales reps.

To say that the Commission has been stagnate in advancing new regulations, or even guidance on the matter, may be an understatement.

Even if the SEC were to prioritize a new fiduciary rule, the process could take years. But Allen thinks the Commission could issue new enforcement guidance on the Advisers Act in as few as six months.

“It would be a whole lot quicker to do it that way than trying to write a new fiduciary rule,” he said.

Moreover, industry would be open to clearer enforcement guidance on Section 208 (c), even though Allen says broker-dealers have resisted that call in the past. That was before Labor finalized its fiduciary rule, noted Allen. “Clarity on how titles are enforced would be a whole lot easier for industry to comply with.”

Some opponents of Labor’s rule would like to see it replaced with more disclosure requirements.

Allen is among those who doubt that approach would effectively ameliorate investor confusion.

“Even if it took half a page to write new disclosures, it wouldn’t be simple,” he said. “How much simpler can it be to require sales persons to call themselves sales persons, and not advisers.”

Instant Insights /

CFA Institute to SEC Chair on fiduciary rule: Keep It Simple

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