There has been a lot of hope lately about the likelihood for the SEC to take control over the fiduciary rule and craft a comprehensive new regulation. However, the odds of the SEC doing so look increasingly long. The agency itself has made several distancing comments lately, such as SEC chief Jay Clayton admitting there was “no silver bullet” for a new rule. Not only does the SEC have the big challenge of harmonizing a fiduciary rule across all types of accounts, but it is facing a fierce and divisive political climate. Many states are already crafting their own fiduciary rules, another factor the SEC must overcome as it needs to appease all the states. There is also internal division within the SEC, as some commissioners are against the crafting of a new fiduciary rule, while others are for it.
FINSUM: On top of all these headwinds, there is also the constant barrage of lawsuits which will try to stop the SEC at every turn. We think it will take several years for the SEC to make a rule, if it ever even gets there. That means we will either need to live with the DOL fiduciary rule, or it will be tossed out once and for all.
If the fiduciary rule has been good for anything, it has been top-line revenues from assets flowing into fee-based accounts. Fee-based accounts generate up to 50% more revenue than commission accounts on a Dollar for Dollar basis, which has meant the flow of assets caused by the fiduciary rule has been very profitable for firms. However, the flood into fee-based accounts is starting to slow already. Third quarter inflows to fee-based accounts dropped 21% from the second quarter. The slowing seems to stem from the long-term delay of the full implementation of the rule and the doubt about its future.
FINSUM: The fiduciary rule has been very good for the bottom line of firms, but has not been good for clients and has not helped advisor compensation.
After months of discussion and awkward non-committal but very public comments, the SEC and DOL have finally made a solid announcement. The SEC has now stated that the pair are finally working in collaboration on drafting a new fiduciary rule proposal. SEC chief Clayton says that after months of digesting public commentary, the SEC is now ready to move forward with drafting a new rule. Clayton confirmed to Congress that his agency and the DOL had begun working on the new rule. The SEC is seeking a single harmonized rule for all accounts, with Clayton saying “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”.
FINSUM: We think this is very good news. The SEC is an infinitely more adept regulator than the DOL when it comes to financial markets, so we expect the new version of the rule will be much improved for all. That said, there is still no announced timeline, which is a bit frustrating.
While somewhat irked that it still exists at all, the industry seems to be pleasantly surprised at the recent move by the DOL to delay the full implementation date of the fiduciary rule to July 2019. The long timeline, and corresponding comfort that gave, however, may be in doubt, as a new court challenge may result in the delay getting thrown out. A consortium of consumer advocate groups will launch a legal challenge which questions the DOL’s right to delay the rule. The case will challenge whether the “delay” is really a “stay” of the rule in disguise, and it will question the DOL’s authority to do it in the first place.
FINSUM: Anything opposing the fiduciary rule has never done very well in the courts, so it is probable that this challenge could have legs.
SEC chief Jay Clayton spoke to Congress yesterday. While the discussion was supposed to be about how the SEC handled the 2016 hack of its EDGAR system, a large portion of it was focused on fiduciary duty. Clayton reaffirmed that the fiduciary rule was a top priority for him and that the SEC was pushing toward a new fiduciary rule in collaboration with the DOL. Clayton confirmed that the rule needed to meet four principles, including that the new rule would need to apply equally to all accounts and that the DOL, SEC, and states would need to work in unison.
FINSUM: We think this is great news for the whole industry. Clayton confirmed the SEC is working with the DOL on a new and comprehensive rule, and we cannot help but think it will be much better crafted than the current disaster.