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SEC presses forward with its fiduciary rule plans after court vacates DOL reg

The SEC may finally propose a fiduciary rule in the near future, potentially granting a long-awaited wish for many industry participants.

For several months, Wall Street's top regulator has indicated that it was developing a fiduciary rule of its own, years after the Department of Labor promulgated the Conflict of Interest Rule during the Obama administration. SEC Chairman Jay Clayton has called for improved guidance on how financial advice is provided to investors; a fiduciary rule is thought to be one way of clarifying what it legally means to be a "financial adviser."

Clayton says the agency will "soon" roll out its fiduciary rule.

"I'm not sitting on this," he said March 19 during a Securities Industry and Financial Markets Association conference. "We're moving forward."

The SEC's rule will come on the heels of a court ruling that may mark the end of the Labor Department's hotly contested regulation. On March 15, the U.S. Court of Appeals for the Fifth Circuit vacated the Labor Department's rule, which was designed to raise the standard of care under which advisers working on retirement accounts operate.

The decision is just the latest snag for the Labor Department's rule, which was partially rolled out in June 2017. Months later, the Labor Department officially delayed the rule's full implementation by 18 months to July 1, 2019, as tensions rose among industry participants over a key part in the regulation: the best-interest contract exemption.

The mechanism sparked fear among industry participants who worried that the exemption would allow investors to legally challenge whether their financial advisers acted in their best interest. Concerns over the exemption proved to be a guiding factor for the appellate court, which wrote in the March 15 decision that the exemption "supplants former exemptions with a web of duties and legal vulnerabilities."

What the end result will be for the Labor Department's rule is not yet clear. A Labor Department spokesperson wrote in a statement that "pending further review" it would not enforce its rule. The Labor Department referred a separate query on whether it would seek an en banc review of the appellate court's decision to the Department of Justice, which said in an emailed statement that it is "considering our next steps."

Since the Labor Department's rule emerged in 2015, a number of broker/dealers, insurers and other financial services companies have urged the SEC to develop its own rule. Under the Dodd-Frank Act, the SEC is named as the rightful regulator to impose a fiduciary duty on brokers, and that it does not prohibit broker commissions, SEC Investor Advocate Rick Fleming said March 16 at an Investment Adviser Compliance conference.

Several industry participants, including industry trade group SIFMA, believe that the SEC's rule will aim to clarify the roles of advice-providing professionals across accounts, rather than just retirement accounts like the Labor Department's rule.

SIFMA, which represents hundreds of banks, broker/dealers and asset managers, expects the SEC to mandate that financial advice professionals provide their clients with a "simple, plain English disclosure document" detailing their roles, SIFMA Executive Vice President and General Counsel Ira Hammerman said in an interview. SIFMA was one of several co-plaintiffs in the case against the Labor Department.

"If you're seeking me for advice, it shouldn't matter if you're doing that for your [individual retirement account] or your regular brokerage account," Hammerman said. "There will be greater efficiency because whatever the SEC comes out with will apply across the board."

The various titles used within the wealth management space may be a source of confusion for investors. Financial advisers and brokers operate under the same suitability standard, and are required to guide clients toward suitable investments. Investment advisers, meanwhile, abide by a fiduciary standard that requires them to operate with their clients' best interests in mind, Jim Allen, head of capital markets policy in the Americas for CFA Institute, explained.

"There's obviously investor confusion out there," Allen said in an interview. The SEC "needs to get control of the titles so that investors have a fighting chance from the get-go to understand where that broker is coming from."

An SEC spokesperson declined to comment on the regulator's work or when such a rule could be proposed. But it is possible that the regulator may be looking to speed up the unveiling of its rule as states like Nevada, Connecticut and New York, among others, have already taken legislative steps to implement fiduciary duty laws, Allen said. Nevada's law went into effect in July 2017, while a similar conflict of interest law in Connecticut went into effect in October 2017.

While the federal rules stand in a state of limbo, companies have been working to become compliant with an expected fiduciary standard for several years now, as many expected the standard to become law in some fashion or another, PricewaterhouseCoopers U.S. Asset and Wealth Management Leader Tom Holly said.

"A lot of companies realized what was going to be expected," Holly said in an interview. "Companies were very proactive in beginning to deal with this."