SEC: Fiduciary rulemaking in the post Fiduciary rule world 

After nearly 80 years of regulating investment advice, will the SEC take the lead in rulemaking, to preserve investor choice?

The SEC (Securities and Exchange Commission) has been regulating investment advisors since 1940, when the Investment Advisors Act1 was passed. The Act aims to prevent abuses on the part of advisors, such as unproven ‘hot tips’ and unclear performance fees. With the recent arrival of the DOL (Department of Labor) Fiduciary Rule, which seeks to satisfy a ‘best interest’ standard for investment advice, the natural question is: Why is the DOL the executive agency advocating rules regarding investor advice, and not the SEC?

This question has been posed (and answered) by republican members of the House Financial Services Committee in the Financial Choice Act, proposed in June 2017. The bill specifically repeals the DOL’s Fiduciary Rule, prohibiting anyone from issuing a rule on fiduciary standards until 60 days after the SEC has issued a regulation.

SEC begins its rulemaking process

On June 1, 2017, SEC Chairman Jay Clayton issued a public statement on standards of conduct for investment advisors and broker-dealers where he addressed the DOL’s Fiduciary Rule. Clayton reaffirmed the breadth of the DOL’s rule, stating that it may:

  • Have significant effects on retail investors and entities regulated by the SEC;
  • Have broader effects on capital markets;
  • Affect matters that fall within the SEC’s mission of protecting investors, such as maintaining fair, orderly and efficient markets and facilitating capital formation.


Clayton went on to explain that the SEC had been reviewing the standards of conduct for investment for over ten years, citing a study of investor perspectives commissioned in 2006 and released in 2008.  He discussed potential actions from maintaining the existing regulatory structure to creating a single standard of conduct for both investment advisors and broker-dealers, and a variety of solutions in-between.

 Public comments on fiduciary standards

In response to Clayton’s request for public comments from retail investors and other interested parties, so far, over 150 have been received. These include comments from head of advisory services at a top-5 U.S. bank (by asset size), a U.S. Senator and individual investors. 

The comments are both in support and against SEC rulemaking on the conduct of investment advisors and broker dealers. Some trade associations are strongly against the DOL Fiduciary Rule. For example, the Investment Company Institute commented that “While DOL intended the rule to improve the quality of the financial advice that retirement investors receive, the rule, in practice, instead has harmed these investors in multiple ways.” In contrast, Sen. Warren (D-MA) in her comment letter states that “the rule has made investing retirement savings easier, cheaper and safer for working Americans.” 
A path forward for SEC
In recent congressional hearings at the Senate Banking Committee and the House Financial Services Committee, Clayton explained that the SEC was reviewing the information from interested parties and evaluating the next steps related to fiduciary rulemaking. During the House Financial Services Committee hearing, Clayton was specifically asked about the SEC’s timeline on its fiduciary standards rulemaking by Rep. Ann Wagner (R-MO). While Clayton did not commit to a timeline, he did confirm that “the next step in anything like this would be a rule proposal” and that the SEC was “working on such a proposal.” 
SEC Commissioner’s and recent nominees’ perspectives
On July 25, 2017, SEC Commissioner Michael Piwowar filed a public comment in response to the DOL’s request for Information related to the Fiduciary Rule. Piwowar encourages the Department of Labor to “reconsider this misguided rulemaking” and raises three major concerns:
1: The DOL Fiduciary Rule is dismissive of the efficacy of conflict of interest disclosure, a view that runs contrary to decades of Commission experience;
2: The DOL Fiduciary Rule fails sufficiently to distinguish “selling” activities from “advice” activities, undermining the Commission’s longstanding approach to regulation of broker-dealers and investment advisors; and
3: The effects of the DOL Fiduciary Rule will extend beyond retirement accounts and will be disruptive of the broker-client relationship in general.

Additionally, President Trump recently announced two nominations – a democrat and a republican - for the vacant commissioner seats at the Securities and Exchange Commission2. In May, the republican nominee Hester Peirce wrote in a U.S. News and World Report article that, “The rule is rooted in the belief that investors cannot choose for themselves. The Securities and Exchange Commission should be allowed to take the lead in any rulemaking related to investors’ interactions with financial professionals. Its approach to regulation preserves investor choice: Ensure that investors get the information they need to decide for themselves which products and services work for them.” The democratic nominee Robert Jackson has been less outspoken on the DOL Fiduciary Rule, but recently commented during a confirmation hearing at the Senate Banking Committee that the SEC should have an “important role in the development of fiduciary standards.” 

While we wait

With the DOL’s likely 18-month delay on the final implementation of the Fiduciary Rule, there is an opening to amend or repeal some controversial aspects of the rule. Some in the industry view the DOL’s extended delay as a sign that the agency wants to collaborate with other federal and state regulators, including the SEC. There is also an opportunity for the SEC to reach out to the DOL and state legislators and regulators when undertaking its own rulemaking process.

However, individual states, also have the authority to regulate the fiduciary space, alongside the DOL and the SEC. Nevada and Connecticut were the first to act, with Nevada passing fiduciary legislation that became effective within a month of being signed.

Many states operate biennium legislative sessions aligned with the Congressional legislative cycle. This typically means that there is a significant push to get legislation through before adjournment at the end of 2018. The 18-month delay will likely extend beyond next adjournment of state legislative sessions. If there is no federal action in the interim, more states could follow Nevada and Connecticut. Some may take a wait-and-see approach, evaluating how the disclosure requirements passed in those two states impact investment advice.

Capco continues to monitor fiduciary developments, including tracking key stakeholder actions at the federal and state levels.


1The Investment Advisors Act defines an investment advisor as “any person or firm that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing reports, or furnishing analyses on securities, either directly or through publications.”




About the Author

Kevin Cochran


Kevin Cochran is a Consultant within Capco’s Center of Regulatory Intelligence, based in Washington D.C. He focuses on regulatory intelligence and policy developments and is part of Capco’s fiduciary services practice.


The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.