WEBVTT - Fiduciary Rule Detractors Get Second Chance at SEC (Audio) 0:00:00.040 --> 0:00:03.680 Remember the controversial fiduciary rule passed by the Obama era 0:00:03.800 --> 0:00:07.200 Labor Department. It states that financial advisers must put their 0:00:07.240 --> 0:00:11.120 client's interest ahead of their own. Secretary of Labor Alexandra 0:00:11.280 --> 0:00:14.120 Cousta has said the rule will kick into effect on 0:00:14.320 --> 0:00:17.360 June nine, but don't circle that on your calendar yet. 0:00:17.560 --> 0:00:20.360 The final implementation of the rule doesn't go into effect 0:00:20.440 --> 0:00:24.440 until January one, and a luck can happen. In February, 0:00:24.480 --> 0:00:27.720 President Trump signed an executive order to try to roll 0:00:27.800 --> 0:00:32.800 back the fiduciary rule, with Republican Representative and Wagner of Missouri, 0:00:32.880 --> 0:00:35.919 who has been fighting to kill the rule, standing behind him. 0:00:36.240 --> 0:00:40.400 You are returning the American people, lowe mill income investors 0:00:40.440 --> 0:00:44.800 and retirees their control of their own retirement saving. This 0:00:44.880 --> 0:00:47.839 is about a main street and I am. It's been 0:00:47.880 --> 0:00:51.560 a labor of love for me. The Securities and Exchange 0:00:51.560 --> 0:00:54.760 Commission was given the authority to promulgate a fiduciary rule, 0:00:55.080 --> 0:00:58.080 and now it appears the sec is considering reviewing the 0:00:58.120 --> 0:01:02.000 responsibility that brokers have to their clients, perhaps giving the 0:01:02.040 --> 0:01:05.360 finance industry and opportunity to chip away at the rule, 0:01:05.640 --> 0:01:09.480 cracking down on conflicts of interests. We have two experts 0:01:09.520 --> 0:01:13.000 in the area with us, John Coffee, professor at Columbia 0:01:13.080 --> 0:01:15.760 Law School and Jill Fish, professor at the University of 0:01:15.760 --> 0:01:19.200 Pennsylvania Law School. Jack as I said, this was a 0:01:19.240 --> 0:01:23.360 controversial rule from the start. Let's go back and explain 0:01:23.440 --> 0:01:27.360 why the Obama administration believed it was necessary and whether 0:01:27.400 --> 0:01:31.680 you agree with it. Okay, Basically, we need to understand 0:01:31.760 --> 0:01:36.800 that today, under current law, an adviser who provides retirement 0:01:36.880 --> 0:01:40.160 investment advice to a client, whether it's a four oh 0:01:40.160 --> 0:01:42.959 one K holder and i RA A holder, or some 0:01:43.080 --> 0:01:46.759 other kind of client, is not a fiduciary of that client. 0:01:47.319 --> 0:01:51.440 His only obligation is not to recommend products to the 0:01:51.520 --> 0:01:55.280 client that are clearly unsuitable because there is much more 0:01:55.440 --> 0:01:59.360 risk or it's totally inconsistent with the client's retirement needs, 0:01:59.760 --> 0:02:02.280 but doesn't have to act in the best interests of 0:02:02.320 --> 0:02:07.200 the client. That means, for example, he could give imprudent advice, 0:02:07.360 --> 0:02:10.679 negligent advice with immunity, or more typically, he could give 0:02:10.800 --> 0:02:15.840 disloyal self inner to advice by recommending, for example, a 0:02:15.919 --> 0:02:19.680 mutual fund that was sponsored by his employer, a large 0:02:19.720 --> 0:02:23.880 broker dealer which charges much higher fees than other funds 0:02:23.919 --> 0:02:28.000 that are substantially equivalent. That would violate a fiduciary standard, 0:02:28.240 --> 0:02:31.600 which always requires that you act in the best interests 0:02:31.639 --> 0:02:35.440 of your client, but it would not violate the suitability standard. 0:02:35.720 --> 0:02:39.400 The Department of Labor standard would effectively say you couldn't 0:02:39.400 --> 0:02:42.080 act when you had a conflict of interest. You couldn't 0:02:42.080 --> 0:02:45.440 recommend any product if there was a product that might 0:02:45.480 --> 0:02:50.120 be superior to this. This would change substantially practices in 0:02:50.160 --> 0:02:53.560 the industry. In fact, it already is changing practices within 0:02:53.560 --> 0:02:57.960 the industry, but it's bitterly controversial. One last point. Under 0:02:57.960 --> 0:03:02.960 President Obama, the White House Council of Economic Advisors estimated 0:03:03.280 --> 0:03:09.280 that each year Americans pay seventeen billion in unnecessary fees 0:03:09.639 --> 0:03:13.120 because their advisors need not act as fiduciaries. That's a 0:03:13.120 --> 0:03:15.640 pretty high cost, and of course it means that the 0:03:15.680 --> 0:03:17.920 industry would lose a good deal of money if the 0:03:17.919 --> 0:03:21.440 new rule went into affect. Jill, what's the argument against 0:03:21.520 --> 0:03:25.480 this best interest standard? It sounds like from an investor standpoint, 0:03:25.919 --> 0:03:29.920 a good thing. Um, well, it's certainly the case that 0:03:30.080 --> 0:03:35.160 investors are vulnerable, and historically there have been many instances 0:03:35.200 --> 0:03:39.480 of brokers taking advantage of their clients. The challenges that 0:03:39.520 --> 0:03:42.640 the fiduciary standard is a very high one. We tend 0:03:42.680 --> 0:03:47.280 to think of people like doctors and lawyers acting as fiduciaries, 0:03:47.440 --> 0:03:49.880 and even in those cases, there is the potential for 0:03:49.960 --> 0:03:55.040 conflicts of interest. UH Financial advice brokerage. That's a business, 0:03:55.280 --> 0:03:59.080 and brokers need to be compensated for providing investment advice 0:03:59.120 --> 0:04:03.520 to their clients. But virtually any form of compensation creates 0:04:03.560 --> 0:04:06.160 the potential for a conflict of interest, and that's what 0:04:06.320 --> 0:04:10.640 brokers are facing as they try to restructure their accounts 0:04:10.720 --> 0:04:14.119 to deal with the potential implications of the fiduciary rule. 0:04:14.880 --> 0:04:18.720 One more point before we move on. That seventeen billion 0:04:18.760 --> 0:04:23.480 dollar figure that Jack quoted, that's a very suspect figure. 0:04:23.800 --> 0:04:28.120 It's based on antiquated data the number of questionable assumptions. 0:04:28.279 --> 0:04:31.960 So people are throwing around that number suggesting, well, you know, gee, 0:04:32.000 --> 0:04:36.200 this is something some huge amount the brokers are taking 0:04:36.200 --> 0:04:39.159 away from their customers. But it's quite likely that that 0:04:39.279 --> 0:04:43.719 number is overstated. Jack, do you want to respond quickly 0:04:43.880 --> 0:04:49.640 in thirty seconds? Department of Labor created a special safe 0:04:49.640 --> 0:04:53.560 harbor to make this rule practical and feasible. They say 0:04:53.640 --> 0:04:57.479 that any broker dealer that enters into a best interest 0:04:57.600 --> 0:05:01.599 contract is exempt from their poduce sheary rule. That means 0:05:01.640 --> 0:05:05.080 there is a practical way to comply, and we're seeing 0:05:05.200 --> 0:05:09.440 some brokers take that option because many brokers now are 0:05:09.480 --> 0:05:13.320 moving from a commission basis to their client relationships to 0:05:13.400 --> 0:05:16.800 an annual fee basis, and that annual feed basis can 0:05:17.000 --> 0:05:21.520 more easily comply with the best interest contract exemption under 0:05:21.560 --> 0:05:24.960 the Department of Labors fiduciary rule. I don't know when 0:05:24.960 --> 0:05:27.440 the seventeen billion is too higher too low, but I 0:05:27.480 --> 0:05:29.839 think there is a substantial cost to investors on the 0:05:29.839 --> 0:05:33.080 current system. We've been talking about the fiduciary rule passed 0:05:33.120 --> 0:05:36.799 by the Obama era Labor Department, which states that financial 0:05:36.800 --> 0:05:40.800 advisors basically must put their client's interest ahead of their own, 0:05:41.440 --> 0:05:44.760 and the Secretary of Labor, Alexander Acosta, has said the 0:05:44.839 --> 0:05:48.000 rule will go into effect on June nine. At least 0:05:48.000 --> 0:05:50.760 the beginnings of the rule. We've been talking with Professor 0:05:50.839 --> 0:05:53.880 Jill Fish of the University of Pennsylvania Law School and 0:05:53.920 --> 0:05:59.040 Professor John Coffee of the Columbia Law School. Jill, since 0:05:59.080 --> 0:06:03.159 the Department of Abor rule is on its way into effect. 0:06:03.880 --> 0:06:07.000 What can the SEC do in light of the fact 0:06:07.000 --> 0:06:08.919 that that rule is ongoing? I mean, are they on 0:06:09.000 --> 0:06:13.920 two separate tracks? Uh? In fact, they are. And one 0:06:13.920 --> 0:06:17.520 of the issues that's currently pending before Congress is the 0:06:17.560 --> 0:06:21.159 extent to which UH Congress should override the Department of 0:06:21.240 --> 0:06:27.040 Labor and make UH this regulation firmly within the SEC's hands. 0:06:27.080 --> 0:06:29.240 And to my mind, that makes a lot of sense. 0:06:29.560 --> 0:06:32.200 The SEC has been in the business of protecting investors 0:06:32.240 --> 0:06:35.280 since nineteen thirty four. It's a really in the best 0:06:35.279 --> 0:06:38.240 position to decide how to protect them with respect to 0:06:38.320 --> 0:06:42.040 retirement investing. And it also makes sense to have a 0:06:42.080 --> 0:06:46.760 single standard applied to broker advice, whether it's it's with 0:06:46.800 --> 0:06:51.279 respect to retirement investing or somebody's other assets. You wouldn't 0:06:51.279 --> 0:06:55.080 want two different standards to apply and the broker to say, well, Gee, 0:06:55.120 --> 0:06:58.279 all of a sudden, i'm investing you to with respect 0:06:58.279 --> 0:07:01.760 to this account, now my obligations are different. That would 0:07:01.800 --> 0:07:06.920 be incredibly confusing for investors. Jack Um is the fact 0:07:06.960 --> 0:07:09.280 that that some of these Labor Department rules are going 0:07:09.279 --> 0:07:12.080 to go into effects on June nine, others not until 0:07:12.120 --> 0:07:15.559 January one, and the fact that the SEC is looking 0:07:15.600 --> 0:07:18.360 at this going to produce kind of a marketplace with 0:07:18.600 --> 0:07:20.520 LASH where there will be some rules in effect and 0:07:20.600 --> 0:07:27.000 potentially they will disappear a few months down the road. Well, essentially, 0:07:27.280 --> 0:07:30.560 the SEC has had this issue before it since the 0:07:30.640 --> 0:07:34.120 issue since Dodd Frank was passed in two thousand and ten, 0:07:34.640 --> 0:07:37.520 and they've been paralyzed for the last seven years. They've 0:07:37.520 --> 0:07:41.080 been unable to side to decide what single uniform rules 0:07:41.080 --> 0:07:44.640 should apply. There's a higher standard applicable to investment advisors 0:07:44.800 --> 0:07:47.480 and there's a much lower standard applicable to brokers, and 0:07:47.520 --> 0:07:50.440 they've been politically divided. We have now reached a point 0:07:50.440 --> 0:07:53.680 where they will no longer be politically divided. There will 0:07:53.720 --> 0:07:56.920 be a clear Republican majority. And my fear is that 0:07:57.000 --> 0:08:00.720 in this special area the SEC may move from being 0:08:01.080 --> 0:08:04.960 divided and paralyzed to being politically captured. Because this is 0:08:05.000 --> 0:08:08.600 a tremendously important issue. Too much of the brokerage industry 0:08:08.920 --> 0:08:12.520 that wants to continue under the softer suitability rule and 0:08:12.640 --> 0:08:15.840 doesn't want anything that says they might have to recommend 0:08:15.840 --> 0:08:19.680 the product that's most attractive to their claim. So this 0:08:19.760 --> 0:08:22.640 is not I think the area where the SEC, who's 0:08:22.680 --> 0:08:26.800 going to distinguish itself as the investor's advocate, Jill, Isn't 0:08:26.800 --> 0:08:30.720 that true because President Trump also has been trying to 0:08:30.800 --> 0:08:35.200 get read get rid of additional regulations. There's a lot 0:08:35.280 --> 0:08:40.040 of pressure from Republican lawmakers like A Wagner of Missouri 0:08:40.120 --> 0:08:44.199 on the SEC to do away with these kinds of rules. 0:08:45.440 --> 0:08:48.480 There certainly is a lot of political pressure, and the 0:08:48.520 --> 0:08:53.280 fudiciary rule has been controversial from the outset. But ironically 0:08:53.400 --> 0:08:55.760 a lot of the big Wall Street firms are now 0:08:56.040 --> 0:08:59.840 finding the fudiciary rule is less problematic than they thought, 0:09:00.280 --> 0:09:03.000 in part because in many cases they're going to wind 0:09:03.040 --> 0:09:07.640 up charging their client's higher fees. Eliminating commission based accounts 0:09:07.920 --> 0:09:10.760 in many cases will mean that the customer pays more 0:09:11.280 --> 0:09:16.320 and UM for the small customer, what the big firms 0:09:16.320 --> 0:09:19.320 are doing is simply eliminating those accounts, saying they won't 0:09:19.840 --> 0:09:25.280 take small investors, essentially because it's not economic to service 0:09:25.760 --> 0:09:29.920 very small accounts under a UM assets under management or 0:09:29.960 --> 0:09:33.760 a flatbe type of structure. So UM. It's those types 0:09:33.800 --> 0:09:36.480 of concerns that I think the SEC is really in 0:09:36.520 --> 0:09:40.280 the best position to analyze, Jack, given the views you've 0:09:40.320 --> 0:09:44.440 expressed expressed, did you take any comfort when Alex Acosta, 0:09:44.480 --> 0:09:47.880 the Labor Secretary, said a few days ago that he 0:09:47.960 --> 0:09:51.160 was going to let this rule take effect. I think 0:09:51.160 --> 0:09:54.480 some people have been anticipating, or perhaps hoping, that he 0:09:54.520 --> 0:09:59.160 would either delay it further or or move to block 0:09:59.200 --> 0:10:02.400 it all together. Well, candidly, I did think he was 0:10:02.440 --> 0:10:04.719 probably going to delay it. He said there was no 0:10:04.800 --> 0:10:08.439 principal basis for that, and let's take him at his word. 0:10:08.520 --> 0:10:12.120 It was a principal decision. That rule won't really bite 0:10:12.200 --> 0:10:16.120 until January one of next year, but it will be applicable. 0:10:16.559 --> 0:10:19.040 There are changes going on in the industry. I think 0:10:19.080 --> 0:10:21.560 some of these are for the best. It might be 0:10:21.760 --> 0:10:25.200 that some clients will leave brokers who don't want small accounts, 0:10:25.240 --> 0:10:27.360 but there are plenty of other brokers who do want 0:10:27.400 --> 0:10:30.560 small accounts. I don't think we can assume that people 0:10:30.760 --> 0:10:34.040 who want services won't get them, because the industry is 0:10:34.080 --> 0:10:37.360 extremely competitive. What I think we will see is that 0:10:37.440 --> 0:10:40.200 they will have to be more attention given to the 0:10:40.240 --> 0:10:43.760 best interests of the client. And frankly, brokers are subject 0:10:43.840 --> 0:10:48.200 to enormous conflicts of interest. They are always selling proprietary 0:10:48.240 --> 0:10:51.800 products of their employers, such as mutual funds, and if 0:10:51.840 --> 0:10:54.440 they can ignore that, their employer is selling a more 0:10:54.480 --> 0:10:58.600 expensive product than the competition, the interests of investors suffer. 0:11:00.040 --> 0:11:03.800 Let's talk about timing here, because the SEC's first step, 0:11:03.840 --> 0:11:06.800 I take it would be getting feedback. How long would 0:11:06.840 --> 0:11:11.719 it take to put a rule into effect? The process 0:11:11.840 --> 0:11:15.280 varies tremendously, and it varies in part because the SEC 0:11:15.440 --> 0:11:18.920 itself is still in transition. Jack mentioned the fact that 0:11:18.960 --> 0:11:22.840 we're likely to see in the near term a Republican 0:11:22.920 --> 0:11:26.760 dominated sec SEC, but that's still a work in progress 0:11:26.800 --> 0:11:29.040 as well. I don't think it will take very long 0:11:29.280 --> 0:11:32.679 for the SEC to issue some sort of concept release 0:11:32.840 --> 0:11:35.960 or some sort of request for common and uh sort 0:11:35.960 --> 0:11:38.760 of take the temperature of the industry. And I think, 0:11:39.400 --> 0:11:42.600 given the changes that brokers are making in response to 0:11:42.679 --> 0:11:46.480 the prospect of the Fiducier rule, gathering that information would 0:11:46.480 --> 0:11:49.960 be an important and valuable first step. And Jack, just 0:11:50.040 --> 0:11:53.200 to be clear, what would happen if the SEC issues 0:11:53.240 --> 0:11:57.880 a rule that is directly conflicting with what the Labor 0:11:57.920 --> 0:12:00.520 Department has done? What will be the state of We're 0:12:00.679 --> 0:12:03.600 likely to see some litigation in the courts, but it's 0:12:03.640 --> 0:12:08.040 quite arguable, easily arguable, that the SEC has primary jurisdiction. 0:12:08.440 --> 0:12:11.400 It also might persuade Congress. Remember, we have a Republican 0:12:11.440 --> 0:12:14.520 Congress that could easily pass the bill to President Trump 0:12:14.520 --> 0:12:18.840 would quickly sign, giving the SEC jurisdiction or endorsing the 0:12:18.960 --> 0:12:22.920 SEC's position. So both the courts and the White House 0:12:22.960 --> 0:12:26.440 and Congress will all get into this game because they're 0:12:26.480 --> 0:12:29.800 just too important interests for them to ignore it. And Jill, 0:12:30.200 --> 0:12:34.080 the federal judge did deny a lawsuit brought by industry 0:12:34.120 --> 0:12:38.240 trade groups seeking to overturn the fiduciary rule. So how 0:12:38.400 --> 0:12:40.760 much of an option are the courts in this in 0:12:40.840 --> 0:12:45.880 this instance? Well, what Jack's talking about is the court's 0:12:45.920 --> 0:12:49.720 weighing in if there's a potential conflict between the SEC's 0:12:49.960 --> 0:12:52.800 regulation and what the Department of Labor has done. And 0:12:52.960 --> 0:12:57.040 Jack's also right, it's likely that Congress would intervene as well. Uh, 0:12:57.080 --> 0:13:01.080 some of the bill currently pending for Congress would give 0:13:01.120 --> 0:13:04.400 the SEC the explicit authority to overrule the Department of 0:13:04.520 --> 0:13:07.880 Labor if it so chooses. Well, I'm sure we have 0:13:08.000 --> 0:13:10.360 not heard the last of the fiduciary rule, and we 0:13:10.360 --> 0:13:13.040 hope that you both come back on Bloomberg Law with 0:13:13.200 --> 0:13:16.000 us again the next time the issue comes up. That's 0:13:16.080 --> 0:13:19.080 Jill Fish Professor at the University of Pennsylvania Law School 0:13:19.320 --> 0:13:22.160 and John Coffee Professor at Columbia Law School.