Sen. Elizabeth Warren harangued Securities and Exchange Commission (SEC) Chairman Jay Clayton last week over the commission’s apparent hesitation in mandating a “fiduciary” standard similar to the one used by chartered financial professionals for all broker-dealers.
“Your own data show that a lot of investors have no idea what the difference between brokers and investment advisors is,” Warren told Clayton during a meeting of the Senate Committee on Banking, Housing, and Urban Affairs last week, adding that a recent SEC study showed that investors cannot understand the language used in standard disclosures. “When your own study shows that disclosures don’t work to help regular investors to make informed decisions, will you move away from a disclosure-based approach in your final rule and just adopt a uniform fiduciary standard for both advisors and brokers as Congress instructed in [Dodd-Frank]?”
Under “Proposed Rule Best Interest,” the SEC would require broker-dealers to put investors’ best interests ahead of their commission concerns or bottom-line. The proposal, however, does not define what best interest means and appears to say that the rule will not be as strict as the fiduciary standard used by Certified Financial Planners and other financial advisors. The SEC is still soliciting comments from financial services professionals regarding the proposal.
“While the two standards are based on common principles, under the proposal, some obligations of broker-dealers and investment advisers will differ because the relationship models of these financial professionals differ,” Clayton said during prepared testimony. “But – importantly – the principles are the same, and I believe the outcomes under both models should be the same: retail investors receive advice provided with diligence and care that does not put the financial professional’s interests ahead of the investor’s interests.”
Responding to Warren, Clayton said that the fiduciary standard often falls short in protecting investors as advisors can “contract around it” using “informed consent.” Clayton added that the SEC still may use the fiduciary for all finance professionals, and that implementing the regulation was a high priority for the coming year.
Warren’s office did not respond to questions about loopholes in the fiduciary standard by press time.
The Department of Labor (DOL) attempted to implement a blanket fiduciary standard but the effort was delayed first by the Trump Administration and, later, was struck down in court as being outside the DOL’s area of responsibility. The Obama Administration had originally pushed the DOL to implement a regulation after the SEC declined to do so.
