The question now is — what’s next? As I travel around the country speaking to advisors, many ask — is a new attempt at establishing a fiduciary rule forthcoming? If so, what does it entail?
I recently discussed this issue with Ira Hammerman, Executive Vice President and General Counsel of the Securities Industry and Financial Markets Association, or SIFMA. In the policymaking and legislative arena, SIFMA serves as the voice of the nation’s security industry, bringing together the shared interest of hundreds of brokers and dealers, investment banks and asset managers. Mr. Hammerman has overseen SIFMA’s legal advocacy efforts and outside counsel relationships since 2004.
Historically, what has been SIFMA’s position on establishing a fiduciary rule?
Ira Hammerman: SIFMA has been advocating for there to be a uniform fiduciary standard of care, when an advisor or a broker was giving investment advice to the retail public, since 2007 — so before the Financial Crisis came into full existence.
What’s the recent legislative history of this issue? How did the Department of Labor get involved?
Ira Hammerman: As a result of the Financial Crisis, the Dodd-Frank Act was signed into law by President Obama in 2010. It runs almost a thousand pages, but there is no mention of the Department of Labor [acting] in the fiduciary space. We were surprised when they initiated their own rulemaking on fiduciary. It led us to engage with [them] for eight years to challenge what the department was doing because in the Dodd-Frank Act, Congress [delegated] to the Securities and Exchange Commission. They are the primary regulator of broker/dealers and investment advisors. But to just accelerate the story — the industry reacted negatively to the DOL proposal.
Were you surprised when the US Fifth Circuit Court of Appeal threw out the rule?
Ira Hammerman: Anytime you go into litigation, there’s a risk, even though you feel confident with your position and your case. But we were pleased with the outcome. I think at the core, you had a jurisdictional grab being attempted by the DOL into the jurisdiction of the SEC and the court in a two-one decision agreed that it violated the Administrative Procedures Act.
So where are we now?
Ira Hammerman: On April 18, the SEC put out a package of proposals called “Reg BI,” B-I standing for “best interest,” and this was a very significant development and milestone for the SEC. We’ve been at this for 11 years [and] this was the first time we had an SEC chairman — Jay Clayton — put out a proposal. This was a nice milestone development.
What do you think the SEC got right with Reg BI?
Ira Hammerman: The first thing that I think they got right is they are elevating the standard of care that applies today to broker/dealers to a “best interest of the customer” standard and clearly articulating that the broker/dealer cannot put his or her interest ahead of the customer’s.
What are some things that SIMFA has suggested be changed?
Ira Hammerman: One quick example is the definition of who is a retail customer — a retail investor varies and the [current] SEC definition is different than the term that already exists under FINRA rules. We think it should be the FINRA definition, since firms have lived with that, developed technology around that and other compliant systems, so that’s an example of something that we think can be improved without losing any of the import of the overall rule.
The SEC has said they’re going to have a final rule ready by September 2019. Does that seem plausible?
Ira Hammerman: I think what you’re referencing with the September 2019 dates for the SEC is some disclosures that they made in predicting what their agenda will be for the 12 months going forward. They’re not obligated to stick to that timetable, but that’s their attempt to put a marker down as to the timetable and thought process.
Can it be done sooner? Possibly. I would say that I think this rulemaking that we’ve been talking about this morning is Chairman Clayton’s top priority.
How long do you think the SEC would give firms and advisors to comply with the new regulations? The DOL was going to give them 12 months, which got extended to 18 months — what about this time around?
Ira Hammerman: That’s a very important piece to implementing what would be a very comprehensive new regulation. In our comment letter, we’re asking for at least 24 months. Anytime you make a change in regulation, you need to develop compliance policies, procedures, computer systems, the technology — it all has to work and it has to work well from the get-go because you have exposure from day one of the regulation going into effect.
Do you have any final thoughts regarding this potential SEC rule?
Ira Hammerman: I think this would take a material step forward in elevating the standard of care that applies to broker/dealers — the Suitability Standard being elevated to a Best Interest Standard — and that could only benefit Mom and Pop customers.
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