From DOL to SEC and Beyond

From DOL to SEC and Beyond

Will the SEC Play a Larger Role in Retirement Plan Governance?

Events of recent months indicate that a regulatory shift may be occurring.

This shift is an important one for plan fiduciaries, sponsors and participants.The shift: The Department of Labor has gone silent on the conflicts of interest in the financial industry that affect retirement plans, while the Securities and Exchange Commission seems to have taken up the responsibility for addressing these issues. This blog will discuss this shift and some of the consequences.

Some Signals of a Shift

Even before the DOL’s fiduciary rule was struck down by the United States Court of Appeals for the Fifth Circuit (see, Secretary of Labor Acosta did not seem to be an enthusiastic supporter of the DOL’s fiduciary rule, criticizing the process followed by the Obama administration in adopting the rule ( Moreover, the DOL’s decision to not appeal the Fifth Circuit’s decision to the Supreme Court was a very clear signal that the DOL does not seek to address these fiduciary issues. And, in contrast to SEC activity (discussed below), the DOL has been remarkably silent on financial firms’ conflicted service models.

In contrast to the DOL, the SEC has been more active in tackling the issues surrounding conflicted service models. Most notably, the SEC has issued proposed rules, requiring that broker-dealers act in clients’ “best interests.” Under the SEC proposal, a broker- dealer “shall act in the best interest of the retail customer…without placing the financial or other interest of the [broker-dealer] ahead of the retail customer.” The SEC proposal a number of limitations; for example, the proposal affects only broker-dealers subject to SEC registration and does not impact other professionals (such as insurance agents) and the “best interest” standard defined by the SEC still leaves lots of room for conflicted service models. For a fuller discussion of the SEC proposal, see

Nonetheless, the SEC’s proposal can be seen as a recognition that conflicted service models are detrimental to consumers (including retirement plan participants) and that regulatory action is appropriate.

In addition to formal regulations, public statements by SEC commissioners also signal a mindset that is willing to address these issues. For example, SEC Chairman Jay Clayton recently released a statement identifying his perspective on standards of conduct for investment professionals. Chairman Clayton’s comments touched on a number of points that concern retirement plan participants and fiduciaries, including transparency in compensation practices, conflicted service models, and transparency of fees:

[I]t is clear to me that the key differences between broker-dealers and investment advisers are not well understood by many of our Main Street investors. This is a problem: if you do not know (1) the scope of services your investment professional is providing and the related obligations, (2) the fees you are paying and (3) how the professional is compensated, your ability to ask good questions and make good choices is limited.

There are certain questions that I believe every financial professional should be able to answer fully and in plain language. One of my favorite questions, which I have suggested at the roundtables that Main Street investors ask their financial professionals, is: “how much of my money is going to work for me?” This question highlights important considerations such as expenses, fees and commissions, and provides a basis for comparing investment professionals as well as specific investment recommendations.

Finally, Main Street investors have no tolerance for certain questionable sales practices such as high-pressure, product-based sales contests. In these circumstances, I do not believe it is possible for an investment professional to say with credibility that the
investment professional is not putting his or her own interests ahead of the interests of the customer.

Commissioner Clayton’s comments do not represent formal regulatory guidance or the official position of the SEC. However, these comments do represent an important perspective — and a perspective that has not been voiced by the DOL.

What Does it Mean?

Plan sponsors and fiduciaries have, historically, focused on ERISA to guide standards of conduct and to provide regulatory protections for plans and participants. In light of recent events, it might be helpful for benefits professionals to learn more about federal securities laws and how those laws might become increasingly important.