As if there wasn’t enough confusion among advisors and clients about the proposed fiduciary rules from the Department of Labor (DOL), Securities and Exchange Commission (SEC) Chairwoman Mary Jo White is now saying that any fiduciary standard from her organization could be different than those proposed by the DOL. White, quoted in Investment News, says of the efforts of the two agencies: “You try to make them land identically, if you can. But they're separate agencies [with] separate statutory mandates.” White also indicated in the article that she supports a uniform fiduciary standard. She would have to convince at least two of her fellow commissioners on the five-person group.

Many financial advisors and financial services firms are already confused by the impact of the proposed DOL rules. Having a potential second set of rules to comply with will be difficult for many. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

SEC and Enforcement of DOL Rules

The Investment News piece raised an interesting point. Will the SEC enforce the proposed DOL fiduciary rules once they take effect? According to White: “They have some enforcement authority on their own. We don't enforce the Labor Department rules per se. Our enforcement authority is under the federal securities laws.” This stance makes what were already somewhat confusing rules even a bit more confusing for financial advisors, especially those from the broker-dealer world. I suspect that smaller broker-dealers may merge with larger firms over this in addition to the outright sale of broker networks as we’ve seen by American Investment Group and Metropolitan Life Insurance Co.

Retirement Focus of DOL

The DOL’s proposed fiduciary rules pertain to financial advisors who deal with their client’s retirement assets. The main impact is anticipated to be connected with IRAs in several ways. First, advisors will need to act in manner that puts their client’s interests first. This is widely interpreted to mean that commissioned products largely won’t qualify, though there is a provision for a disclosure document that would allow for these and some other products that otherwise might not qualify. (For related reading, see: How Advisors Can Plan for Fiduciary Rule Changes.)

Rollovers from 401(k) plans to IRAs will certainly come under scrutiny under these rules. One area cited has been financial advisors who roll clients from low cost 401(k) plans to an IRA where they might normally put the client into commissioned products or higher cost proprietary mutual funds. Financial advisors who have experience advising sponsors of 401(k)s or other qualified retirement plans will likely have less trouble adjusting to the DOL fiduciary standards than others. Much of this sounds somewhat similar to the ERISA rules, which are enforced by the DOL.

Securities Focus of SEC

As mentioned above, the SEC’s enforcement authority is based in the U.S securities rules and laws. By some accounts Bernie Madoff was a fiduciary. He was registered as an investment advisor with the SEC, something that comes with an implicit fiduciary duty. While from all appearances he was putting his client’s interests first, the reality of course was that he was doing anything but this.

According to the SEC’s site on the topic of investment advisors as fiduciaries: "As an investment advisor, you are a “fiduciary” to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients." (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)

Looking at the rest of this section and adjoining sections on the site, the focus here seems to be about safeguarding client assets, having a documented investment process and avoiding conflicts of interest. All, of course, are important and valid areas for enforcement but clearly the SEC definition of a fiduciary is different than what the DOL seems to be proposing.

Impact of Two Standards

A Fidelity survey found that half of the registered investment advisors (RIAs) surveyed thought the addition of the DOL Fiduciary standard to the SEC rules already in place would have a negative impact on their business. A little more than half (55%) anticipate an increase time for compliance and related tasks and 40% anticipate an increase in their overall cost of doing business. RIAs already are required to have compliance regimens in place, so it is likely these negative reactions to another set of rules is rooted in the fact that there would now be two sets of fiduciary rules to comply with. (For more, see: DOL Fiduciary Rule: RIAs See Negative Impact.)

The Bottom Line

The proposed DOL fiduciary rules could be enacted as early as April or May, according to some reports. There will be compliance issues here for many financial advisors and implications for their clients. Add to this the potential of a second, and possibly different, set of fiduciary rules from the SEC and this becomes a bit of a compliance nightmare. (For more, see: The Coming Fiduciary Rule: Advisor and Client Impact.)

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