Regulatory Confusion Keep Advisors, Broker-Dealers In Limbo

LAS VEGAS-- Between the SEC's broad and unspecific recommendations to safeguard shareholders from unscrupulous advisors and the Department of Labor's recent attempts to redefine the conditions under which a financial advisor becomes a fiduciary, the financial advisors and broker-dealers providing the guidance and products investors need for retirement are huddling up to decide which regulations and rule changes they should support in the face of looming legislation.

During an opening general session presentation here at the American Society for Pension Professionals and Actuaries' 401k Summit, ASPPA CEO Brian Graff and Greg Dean, chief counsel for the Senate Committee on Health, Education, Labor, and Pensions (HELP), told attendees that the converging and often divergent regulatory proposals hovering over the financial services industry will remain works in progress as advocates on all sides continue to weigh in with their perspectives while lawmakers and regulators wait for both resources and guidance before making any sweeping changes.

In the wake of the Dodd-Frank Wall Street Reform Act, the SEC, individual states and self-regulatory organizations like FINRA are working to turn gray to black and white by defining exactly what constitutes a fiduciary, how best to create a uniform fiduciary standard to protect investors and what real-world solutions -- in the form of new or existing disclosures, etc. -- can be implemented to educate investors while simultaneously allowing advisors and brokers to earn commissions from products they sell -- or don't sell -- to their clients.

Last week, the Department of Labor for two days heard testimony regarding its proposed rule to expand the definition of fiduciary> that would abandon the five-part test established Employee Retirement Income Security Act of 1974 (ERISA) that allowed advisors and brokers to give advice without being required to work in the best interests of retirement plans and participants.

The DOL's tweak would define anyone who offers recommendations on investing in, buying, holding or selling securities or anyone who provides advice on managing securities or IRAs as a fiduciary.

"What have here are two different regulatory regimes happening at the same time and they're colliding," Dean said. "Everyone's trying to determine and understand from Dodd Frank where do broker-dealers' and investment advisors' fiduciary duties lie?"

Dean told attendees one of the biggest obstacles to clarity and eventual acceptance and adaptation to whatever new regulatory hoops may come is the SEC. Lacking both the financial wherewithal to press on with Congressional-mandated studies on the issue and the political brio to stampede forward with its recommendations in the wake of the game-changing November election, the SEC represents is sort of the cart and the horse and neither is moving with any alacrity.

"The problem is the SEC is not proposing anything," he said. "Its study did outline some options, including one in which FINRA takes over the world. But, in all seriousness, we've got a long way to go before the SEC comes up with anything significant."

Meanwhile, the Labor Department, to the chagrin of several organizations including SIFMA is taking up its own charge and much of the discussion and findings from its two-day brainstorming session will be reviewed by the SEC whenever it's ready to dig into the arduous process of defining important details including exactly what constitutes financial advice and how those who are paid on a commission should best disclose their personal and institutional interests to investors.

"The DOL is racing ahead to come up with their own fiduciary rules," Dean said. "They're taking 35 years of bright-line tests and turned them on their heads. Under the new proposal, almost everyone is a fiduciary and it's causing a great deal of confusion for advisors, broker-dealers and customers."

Graff said that APSSA and other organizations are hoping the Labor Department, SEC and state regulators take a somewhat more modern and reasonable approach to disclosure and sales exemptions. Putting the responsibility for creating a method or checklist for broker-dealers and advisors that would adequately inform investors that the advice or product recommendations they're receiving is or could be adverse to them is almost impossible to achieve or prove to any legal standard, he said.

"Let's come up with some type of objective disclosure," Graff said. "It would level the field so there are two camps. One for people who currently are ERISA fiduciaries and want to be and others that don't want to be and openly disclose they're compensated from investment product providers."