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Single Fiduciary Standard From SEC, DOL Would Create Multiple Problems, Says Consultancy

The financial industry and members of both parties of Congress have urged the agencies to combine their efforts and “harmonize” the controversial rule making in order to produce consistent guidance for investment firms.

August 24, 2012
Related Topics: Finance/Taxes, Policies and Procedures, Legal, Latest News

The Securities and Exchange Commission and the Labor Department should not seek to meld rules that each agency is pursuing to raise the standard of care for investment advice, according to a recent letter to Congress from an organization in the advice sector.

Under the Dodd-Frank financial reform law, the SEC has the authority to promulgate a regulation that would impose a universal fiduciary duty for anyone providing retail investment advice. The Labor Department is working on a re-proposal of a rule that would impose a fiduciary standard on all professionals providing any type of advice to retirement plans.

The financial industry and members of both parties of Congress have urged the agencies to combine their efforts and "harmonize" the controversial rule making in order to produce consistent guidance for investment firms.

That would be a bad idea, according to an August 16 letter to lawmakers from fi360, a firm that provides fiduciary-duty training. SEC and Labor Department investor-protection rules operate under different statutes, with the SEC giving advisers more latitude in working with clients and DOL being much more prescriptive when they work under the Employee Retirement Income Security Act of 1974, the federal law governing retirement plans.

"[T]he fiduciary standard under each law is quite different in its practical application to investment advice," the letter states. "If the SEC and DoL were to truly harmonize their rules, then the agencies would be left with one of two stark choices: 1) require the SEC to impose a higher standard commensurate with ERISA standards, or 2) require the DOL to violate clear legislative requirements under ERISA and thereby weaken the strong fiduciary protections now afforded to retirement plan participants."

The letter puts fi360 at odds with congressional Democrats who sent a letter to the Labor Department in June, urging it to work more closely with the SEC.

In an appearance at a Spark Institute conference this summer, Assistant Labor Secretary Phyllis Borzi said her agency and the SEC would issue compatible but not identical rules because they operate under different laws.

The fi360 letter supports Borzi's position. It points out, for instance, that the Investment Advisers Act of 1940 lacks investment directives while retirement law mandates that portfolios be held in trust and diversified.

"While both laws generally impose a fiduciary duty of loyalty and care on the investment adviser, ERISA's prohibited-transaction rules and its exclusive-purpose standard are far more stringent, and absolutely prohibit transactions between the plan and a plan fiduciary, as well as any party in interest," the letter states.

Although the SEC and DOL fiduciary-duty rules are likely stalled until after the election — and probably into next year — fi360 is preparing for further action by educating members of Congress about the details of fiduciary duty.

"If you go too far to harmonize, you're between a rock and a hard place," said Blaine F. Aikin, fi360's chief executive. "We could be in a perverse situation where — at a time when we're looking to increase investor protection — we're at risk of doing the opposite."

The potential SEC rule would require brokers to act in the best interest of clients, a higher bar than the suitability standard they must now meet when selling financial products.

Labor Department officials say they're pushing the agency's fiduciary duty rule as a way to protect retirees and workers who must provide their own retirement nest eggs through 401(k) and individual retirement accounts.

Financial industry organizations are wary of both rules, saying that flawed regulations could raise adviser costs and price middle-market investors out of the advice market.

Mark Schoeff Jr. writes for InvestmentNews, a sister publication of Workforce Management. To comment, email

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