Establishing a fiduciary standard for investment professionals has been a topic of debate among regulators, politicians, industry insiders and the investing public. Both the Department of Labor (“DOL”) and the Securities and Exchange Commission (“SEC”) are working on establishing a fiduciary standard for the investment professionals they regulate. While they share a stated goal of establishing a fiduciary standard to ensure that investment professionals act in “the best interest of their clients,” their approaches to this common goal are not consistent with major differences in those who are subject to a fiduciary standard and exceptions to that standard.[1] The DOL’s rule proposal relates to a far more limited jurisdiction and has left some questioning its rationale and the effects it will have both on industry professionals and consumers. The SEC’s proposed uniform fiduciary standard, though in a much earlier stage, is expected to be broader reaching and has been heralded as a move in the right direction. Recently, the Financial Industry Regulatory Association (“FINRA”) has called upon the SEC to establish a uniform fiduciary standard that would span across all investment professionals and touted the SEC as the proper agency to implement this change.

 The DOL’s Fiduciary Standard Proposal

In April of 2015, the DOL introduced its proposed rule to extend the definition of who constitutes a fiduciary under the Employment Retirement Income Security Act of 1974 (“ERISA”).[2] The proposed rule is only applicable to those who are providing retirement-related investment advice under the jurisdiction of ERISA and the Internal Revenue Code. This marks the second such effort by the DOL to establish a fiduciary standard and comes after a strong show of support by President Obama toward establishing fiduciary obligations by investment professionals giving retirement advice.[3]

In its latest effort, the DOL sets out to require advisers and firms to put the best interest of their clients above all else. To that end, the rule prohibits advisers from receiving any form of compensation that would create a conflict of interest between the adviser and the investor. The proposed rule contains a number of exceptions in an attempt to reduce the widespread limitations the new definition would require. These exemptions, referred to as “prohibited transaction exemptions,” allow certain broker-dealers, insurance agents and others that act as fiduciaries to continue to receive various forms of compensation that otherwise would be prohibited.[4] The most commonly discussed exemption is the “best interest contract exemption” which would allow firms to continue common compensation practices so long as they adhere to “basic standards aimed at ensuring that their advice is in the best interest of their customers” and further requires pre-point of sale written contracts with investors that clearly disclose conflicts and procedures to protect the client’s best interest.[5] As an overview, the other exemptions permit allowances for generalized retirement advice or acceptance of fees if they are at their lowest level.

Many have voiced their concern as to the adequacy of the DOL’s proposed rule and the research to support its projected effectiveness. For example, the DOL relied on a letter from the U.K. Financial Conduct Authority (“FCA”) that states that replacing commissions with charges or fees has led to a more open marketplace where “investors understand that advice comes at a charge and what that charge is.”[6]However, some in the insurance industry see the DOL’s proposal as an attack on commissions by an agency that does not clearly understand how commissions work. Representatives from the Leadership for Advance Life Underwriting (“AALU”) believe that the rule will actually lead to an increase in the cost of retirement investments and a decrease in both consumer choice and consumer access to responsible, professional retirement planning.[7]

In support of the proposed rule, the DOL also cites a White House Council of Economic Advisers (“the Council”) analysis that found that conflicts of interest in the retirement investment marketplace led to annual losses of about $17 billion per year for investors.[8] However, the Securities Industry and Financial Markets Association (“SIFMA”) recently released a study it commissioned from the National Economic Research Associates (“NERA”) that identifies flaws in the Council’s claim.[9] The NERA report concluded that these calculations were unsupported and further found that smaller investors in the U.K. lost professional broker advice after regulations made it unprofitable for brokers to manage their smaller accounts.[10]

The National Association of Insurance and Financial Advisors (“NAIFA”) has also commented on the DOL rule proposal, stating that it would effectively require all participants to use a fee-only compensation model that would cause most of those receiving retirement advice to no longer be able to be serviced. This is because the broker-dealer model, where brokers are paid by those providing the products, would be non-existent.[11] NAIFA is also concerned that entering into “best interest contracts” with each investor can be a lengthy and time consuming process, negatively affecting the majority of middle and lower-income investors.[12] Lastly, they think that the exemptions only further complicate the process for those financial professionals who want to provide advice to their clients while remaining within the rules and regulations governing their profession.[13]  

The discussion and critique of the DOL’s proposed rule is ongoing, as the DOL rule proposal is open for comments until July 6, 2015. Over the next few months, NAIFA and other industry associations will continue their discussion with the DOL, many hoping that this ongoing dialogue will help the DOL better understand the concerns and criticisms of its proposed rule. [14]  

The SEC’s Uniform Fiduciary Focus

The SEC is also seeking to implement changes to the standard to which the investment professionals under their purview are held. The SEC was given the authority to establish a uniform “best interest standard” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”), enacted in 2010.[15] In March of this year, SEC Chairwoman Mary Jo White publically called for tighter standards for financial industry professionals and stated her intention to implement an industry-wide “uniform fiduciary standard” to ensure that clients’ interests are the primary goal for all industry professionals.[16] Currently, registered representatives of broker-dealers and Investment Advisors are held to different standards of care. Investment Advisors enter into advisory contracts with their clients and agree to undertake, among other things, a fiduciary relationship with their clients.[17] Registered representatives of broker-dealers handling non-discretionary accounts generally owe their clients no such overarching fiduciary duty.[18] Instead, registered representatives are held to a transaction-based suitability standard, meaning that a registered representative is required to make investment recommendations that are reasonable in light of the investor’s financial situation, risk tolerance and investment objectives.[19] The SEC’s recent proposal seeks to implement a single fiduciary standard across the board for all financial professionals, regardless of the type of account they are servicing and without the need for a contractual commitment stating that the investment professional is undertaking a heightened fiduciary obligation. The current viewpoint is that the SEC staff hopes “to develop a ‘principles-based standard’ rooted in that of investment advisers.”[20]

While the SEC was given the power to establish a uniform fiduciary standard five years ago, an official SEC uniform fiduciary rule has not yet materialized. Recent comments by Chairwoman White have not been followed with any official rule proposal. Moreover, while SEC Commissioners are discussing ideas, any proposed rule would still require a Commission vote, rule comment period and ongoing discussions between others in the SEC staff and the industry at large. Furthermore, not all industry professionals are on board with a uniform fiduciary standard.

A uniform fiduciary standard for all investment professionals seems to many to be a logical standard for professionals who provide any form of investment advice. However, different fiduciary standards for broker-dealers and investment advisers allow for more consumer choice in the level of decision-making they want to give their investment professional over their account and the price they want to pay for professional financial advice. The heightened decision-making responsibility of advisers logically leads to higher prices for consumers. Implementing such a standard on broker-dealers who will have to (along with their insurers) take on more responsibility for the investment recommendations they make will force smaller broker-dealers out of business. An all-encompassing fiduciary standard could increase costs and ultimately decrease access to brokers for those clients who are less wealthy.[21]

FINRA Supports A Uniform Fiduciary Standard

Recently, FINRA has expressed concerns with the DOL proposal and, through its CEO Richard Ketchum, has called for the SEC to spearhead the movement to create a uniform fiduciary standard.[22]FINRA and Ketchum share this view with others in the financial industry. Many are concerned that the DOL’s proposed rule, applicable only to those individuals providing particular types of retirement investment advice, would succeed only in confusing consumers and brokers. Those commentators conclude that a uniform fiduciary standard from the SEC would lead to a more stream-lined standard for all brokers to follow and result in a less confused consumer marketplace. A third option is possible, as the DOL and the SEC could each establish their own fiduciary standard, separate from each other, as they operate under different laws and regulations. Chairwoman White has commented on these different roles, however, and assured that they “realize the concerns about consistency and also the impact that their rulemaking can have on the broker dealer model…”[23]

While the SEC and DOL continue discussions, it is clear that the fiduciary debate is far from over. The comment period for the DOL’s rule proposal is open for another two months. Further, the SEC’s own possible fiduciary standard rule has yet to materialize. It is clear that the issue is far from resolved but is certainly something that all in the financial services industry, as well as the investing public, should be following.

[1] Andrew Remo, SEC, DOL Fiduciary Focus: A Potential Double Whammy?, American Society of Pension Professionals & Actuaries (March 26, 2015), available at

[2] Department of Labor Employee Benefits Security Administration, 80 Fed. Reg. 21928 (proposed April 20, 2015)(to be codified at 29 C.F.R. pt. 2509-10), available at

[3] At an AARP speech in February, President Obama stated: “I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interests first. You can't have a conflict of interest.” President Barack Obama, Address at AARP Headquarters to Save Our Retirement Coalition (February 23, 2015)(transcript available at

[4] Proposed rule, supra.

[5] Id. See also, William H. Byrnes and Robert Bloink, Exemptions Provide Key to Unlocking DOL Fiduciary Rules, ThinkAdvisor (May 18, 2015), available at

[6] Warren S. Hersch, AALU: Life Industry Facing a ‘Blood Battle’ over DOL’s Fiduciary Rule, LifeHealthPro (May 8, 2015), available at

[7] Id.

[8] Proposed rule, supra note 2.

[9] Melanie Waddell, All Eyes on SEC Chief to Move Forward, FINRA’s Ketchum Says, ThinkAdvisor (March 16, 2015), available at

[10] Id. See also, Jeremy Berkowitz, Renzo Comolli & Patrick Controy, Review of the White House Report: ‘The Effects of Conflicted Investment Advice on Retirement Savings (National Economic Research Associates, Economic Consulting, 2015), available at

[11] FAQ: The Department of Labor Fiduciary Proposal, Naifa Blog(May 18, 2015, 12:15 PM),

[12] Warren S. Hersch, NAIFA’s McNeely sees a ‘glimmer of hope’ on the fiduciary rule, LifeHelthPro (May 19, 2015), available at

[13] Id.

[14] Id.

[15] Dodd Frank §913(g) permits the SEC to develop rules to provide that:

“…the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, H.R. 4173 (July 21, 2010).

  [16] Justin Baer and Andrew Ackerman, SEC Head Backs Fiduciary Standards for Brokers, Advisers, Wall Street Journal (March 17, 2015), available at

[17] See, generally, the Investment Advisers Act of 1940, codified at 15 U.S.C. § 80b.

[18] See e.g. Study of Investment Advisers and Broker-Dealers (Securities and Exchange Commission Staff) (January 2011),

[19] The regulation of broker-dealers is done through the Securities Act of 1933 (15 U.S.C. §77a-77mm) and the Securities Exchange Act of 1934 (15 U.S.C. §78a-78kk) and SRO Rules based on the same principles, such as FINRA Rule 2111 (“Suitability Rule”). Investment advisers are regulated by the Advisers Act (15 U.S.C. §80b).

[20] David Michaels, SEC Joins Battle on Broker Bias That Could Remake Industry, Bloomberg Business (March 17, 2015), available at

[21] Id.

[22] Melanie Waddell, FINRA’s Ketchum Criticizes DOL Fiduciary Plan, ThinkAdvisor (May 1, 2015), available at

[23] Chairwoman Mary Jo White, Presentation at SIFMA 2013 Annual Meeting (November 11-12, 2013) (transcript available here).

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