A pervasive "fiduciary fatigue" has settled over debate about the SEC's best interest rule, say some investor advocates and experts.

They express both resignation and exasperation at what they see as the commission's unwillingness to provide meaningful investor protections against predatory practices by financial firms and advisors.

"The process has become enervating and exhausting and to the point where you don't even want to look at it anymore," says Lewis Lowenfels, a lawyer and securities law expert.

The SEC's proposal to change standards of client care comes after years of back-and-forth fighting over the Department of Labor's fiduciary rule in the public sphere, halls of Congress and courts.

Wall Street firms and lobbying groups, who fiercely opposed the department's regulation for the costs it imposed on them and for purportedly restricting client choice, succeeded in convincing a federal appeals court to vacate the rule earlier this year.

Now, the SEC's proposed Regulation Best Interest has sparked fresh wrangling between investor advocates and Wall Street trade groups.

"My concern is there's fiduciary fatigue," about the debate surrounding the rule, says Andrew Stoltmann, an attorney president of the Public Investors Arbitration Bar Association, which recently recommended 15 changes to the SEC's draft rule to strengthen it.

"I'm trying to be cautiously optimistic," Stoltmann says, "but there are very strong forces, including some [SEC] commissioners and the industry, that are lobbying very forcefully to water this down."

A spokeswoman for the SEC declined to comment.

The SEC is authorized to craft a fiduciary rule under the 2010 Dodd-Frank Act. Under the law "not only did the SEC have the authority, but they had the mandate, to do something," says James Cox, a professor of securities law at Duke University. But with the new draft rule, he says, "I don't see that they did anything."

The SEC proposal is 408 pages long, which includes an extensive preamble.

"I was stunned by the length of it and the lack of content," Cox says. "First of all, why did it take such a long time develop something that is not just milquetoast, but puffery?

"What I would have hoped for was that the SEC would have at least identified practices that it thought were presumptively in violation of the rule," he adds. For example, he says sending brokers on "cruises for moving inventory doesn't sound like anything other than a minefield for an investor to wander through, in bare feet and blindfolded."

(Bloomberg News)
(Bloomberg News)


However, Stoltmann says that members of PIABA met with SEC Chairman Jay Clayton, and they believe him to be sincere in his desire to get the rule right.

"I'm terminally optimistic," Stoltmann says. "

Perhaps the flood of comments in favor of investor protection will push SEC to make substantial changes, says Denise Valentine, a senior analyst on the wealth management team for Aite Group, a research firm.

The SEC's public comment period on the draft rule ended August 7. The commission had received more than 3,800 comments as of August 5. Many more came in just before the deadline.

"It will be very interesting to see what transpires when [the SEC] reads all those comments," Valentine says.

There are an ample number of voices from both sides of the debate.

"The SEC is not in the position to ignore half the market," she thinks.

Cox is more pessimistic, partly because he thinks Congressmen won't spur the commission to adopt a more stringent standard of client care given that Wall Street bankrolls their election campaigns.

"The brokerage community and the big banks are just so wealthy that running the risk of taking them on is just too difficult," Cox says, adding that only a change in the country's political climate is likely to produce real regulatory reform. "All I can say, is it's just not the right era."

Ann Marsh

Ann Marsh

Ann Marsh is a senior editor and the West Coast bureau chief of Financial Planning. Follow her on Twitter at @Ann_Marsh.