THE BLOG
09/29/2015 02:06 pm ET Updated Sep 29, 2016

Wagner Bill Gets It Backwards: SEC Should Follow DOL's Lead on Fiduciary Duty

The House Financial Services Committee has scheduled a markup for tomorrow of Rep. Ann Wagner's bill undercutting Department of Labor efforts to strengthen protections for American workers and retirees who turn to financial professionals for retirement investment advice. The bill (H.R. 1090) would do this first by halting the DOL rulemaking until the Securities and Exchange Commission finalizes its own, long-awaited fiduciary rule and second by erecting additional barriers in the way of SEC rulemaking.

The premise of the Wagner bill is that retirement savers don't need protection, as Rep. Wagner herself recently acknowledged when she called the DOL rule "a solution in search of a problem." Making the Department follow the SEC's lead is just a convenient way to prevent DOL from acting without having to acknowledge that one opposes a best interest standard for retirement investment advice. Because, if the SEC has made one thing crystal clear over the last 15 years, it is that it is categorically incapable of providing leadership on this or seemingly any other significant retail investor protection issue.

Rather, it is the Department of Labor that has taken a lead, and done so in a way that is completely consistent with what a strong, pro-investor SEC rule under Section 913 of the Dodd-Frank Act might look like.
  • The DOL rule proposal includes a best interest standard that is taken directly from Section 913 of Dodd-Frank.
  • Consistent with that statute, it permits fiduciary advisers to be compensated through commissions and other forms of transaction-based payments.
  • It allows the scope of the relationship - including whether there is an ongoing duty of care - to be determined by contract.
  • And it allows for sales from a limited menu of proprietary products, subject to certain appropriate limitations.
  • But it balances these provisions with tight restraints on the egregious conflicts of interest that pervade the broker-dealer business model.

The SEC could do much worse than to follow the DOL's lead in crafting its own fiduciary standard for brokerage accounts. But for the SEC to do that, it would have to repudiate its past actions. After all, the SEC bears central responsibility for allowing brokers to rebrand themselves as advisers without regulating them accordingly. Both SEC and FINRA have tolerated the toxic conflicts of interest common among broker-dealers, as University of Mississippi School of Law Professor Mercer Bullard starkly outlined in recent testimony before the committee. And the SEC's enforcement of the fiduciary duty under the Investment Advisers Act has been long on disclosure and short on real avoidance of conflicts.

In short, there are good reasons that financial firms want the SEC and FINRA to take the lead on this issue, but they have nothing to do with retail investor protection. This is just one more example of financial firms putting their own interests ahead of those of their customers, which is of course precisely the problem the DOL rule is intended to address.