SEC's Best Interest Standard in Name Only Is No Model for DOL

One of the perplexing mysteries in the debate over the Department of Labor's fiduciary rule is why securities industry representatives who profess to support a best interest standard under the securities laws are so adamantly opposed to the DOL rulemaking based on the exact same principles.

Industry's message is that there is something fundamentally wrong with the DOL rule proposal - that it is, as they like to say, "unworkable." In fact, however, industry's preference for Securities and Exchange Commission rulemaking tells us far more about inadequacies in the SEC's regulatory approach than it does about any imagined flaws in the DOL rule proposal.

For an illustration of the shortcomings in the SEC's enforcement of the fiduciary standard, one need look no further than last month's settlement between the Commission and J.P. Morgan Chase & Co. for failing to provide adequate disclosures to customers regarding conflicts of interest in its advisory business.

First, some background.

As far back as July of 2012, the New York Times began reporting on the aggressive sales culture within JPMorgan and advisers' complaints that they were being encouraged "to favor JPMorgan's own products even when competitors had better-performing or cheaper options." The Times quoted one former adviser as saying: "I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm ... I couldn't call myself objective."

This is the precise problem investor advocates are hoping to solve by holding all financial professionals to a fiduciary "best interest" standard when they provide investment advice.

The practices described in the
articles ultimately formed the basis for the
, which resulted in disgorgement of ill-gotten gains and fines totaling $307 million and an admission of wrongdoing by JPMorgan. What's most notable about the SEC action, however, is what JPMorgan did
get sanctioned for:
  • They did not get sanctioned for steering customers into higher cost proprietary investments when better options were available.
  • And they did not get into trouble for pressuring their financial advisers to recommend investments that the advisers did not believe were the best options for their customers or for allegedly retaliating against advisers who resisted that pressure.

All the firm has to do to get straight with the SEC is improve its disclosure and it can go right on steering customers into investments that benefit the firm at customers' expense. That's not what most of us mean when we talk about a "best interest" standard.

In contrast, the DOL rule would require firms like JPMorgan to act in the best interests of their customers, without regard to their own financial or other interests. Firms would have to eliminate practices designed to encourage and reward advice that is not in customers' best interests. And DOL has made clear that, when it talks about a best interest standard, it means that the financial adviser would have to make recommendations that an impartial expert would view as being in the best interest of the investor based on the circumstances at the time the recommendation is made.

In other words, DOL would require firms to change anti-investor practices, not just disclose them. And that is why financial industry lobbyists oppose DOL rulemaking while supporting SEC action, and why investor advocates have concluded that the SEC is the last place DOL should look for guidance on how to craft a strong, pro-investor rule.