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SEC begins working with DoL on fiduciary rule

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The SEC has begun to work with the Department of Labor on a fiduciary rule proposal to harmonize the standards of conduct for advisors and broker-dealers, Jay Clayton, the agency's chairman, told members of the House Financial Services Committee.

Clayton's comments suggest that after months of collecting and reviewing comments on what a uniform fiduciary standard should look like, the commission is now moving forward on shaping a rule, marking the next stage in what figures to be a contentious process.

"The next step in anything like this would be a rule proposal. We're working on such a proposal," Clayton told Committee members on Wednesday.

Clayton's work to coordinate with the Labor Department and devise a harmonized standard is expected to be more palatable to the brokerage sector and Republican lawmakers who have blasted the partially implemented fiduciary rule.

"Under the previous administration, the SEC dropped the ball on the fiduciary rule and allowed the Department of Labor to insert itself into the SEC's jurisdiction," said Jeb Hensarling, the Texas Republican who chairs the Financial Services Committee. "Surely this must be reversed."
Rep. Ann Wagner (R-Missouri), a leading congressional critic of the Labor Department's rule on retirement advice, plugged legislation that she introduced last week that would repeal that regulation, and then set a best-interest standard of advice for brokers and impose new disclosure requirements.

"If you are sitting across from a broker-dealer, and maybe you have two different accounts with them, it is important that you have the same standard," Wagner said. "Unfortunately that isn't the current practice, and that is causing both confusion and harm."

Clayton assured the panel that that sort of regulatory harmonization is a central goal of his work on a new fiduciary standard.

"There ought to be consistency with us and the Department of Labor. We can't have asymmetric standards. You can't put one hat on when you're talking about 50% of your assets and another hat on when you're talking about another 50. It makes no sense," he said.

"And then we have to cooperate," he added. "They have a mandate. We have a mandate. They're not the same, but we can cooperate and get there, I believe."

In addition to the themes of consistency and cooperation, Clayton rounds out his four C's list of fiduciary goals to include clarity and choice for investors. Critics of the Labor Department rule such as Wagner and major industry groups have argued that the regulation will limit product options and service for investors as firms struggle to comply with the rule.

"I'm confident that we're going to put forward something that addresses those four issues and that has a standard that protects investors and that they understand," Clayton said.

He declined to make a projection for when such a rule proposal might materialize, observing that the fiduciary standard is a complicated issue that lawmakers, regulators and industry groups have been debating for years.

"If this were easy, it would already be fixed," Clayton said. "The devil's in the details, and we're working on it."

When Democrat John Delaney of Maryland questioned Clayton about his views on the Labor Department rule, the chairman lauded the spirit of the regulation, but seemed skeptical about the potential for unintended negative consequences as it is put into effect.

"I like the words: No conflicts. Disclose the conflicts. If you owe someone a duty they should know what it is," he said. "The question is, are we going to implement it in a way that adversely restricts choice in terms of what type of relationship you have, or adversely restricts what type of assets you could invest in?"

Delaney countered with an argument popular among investor advocates who have been pressing for stronger fiduciary standards, arguing that business models can and must adapt to accommodate stronger consumer protections.

"The tradeoff, I guess, is it could encourage a lot of innovation, right?" Delaney said. "Because, as you know, people are sitting in conference rooms right now thinking of companies they can start to take advantage of the rule, which might be good."

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