BISA Magazine - Quarter 3, 2017 - 27

ties and choices available to retail
investors would be affected.
The Statement does not set a deadline
for the submission of comments nor
does it include any timetable for further
Commission action. The breadth of the
questions for which comment is invited
signals an intent by the Chairman to go
back to square one in assessing what,
if any, action the Commission will
ultimately take.

What Happens Next?
The best and most honest answer is
that no one knows whether, or when,
the SEC will engage in rulemaking.
Presently, there are two vacant seats on
the Commission and a third vacancy
is possible (Commissioner Stein's term
expired in June). It seems unlikely that
the Chairman will move forward without a full complement of commissioners. Other unknowns include how the
industry will respond - while it could
be expected that many retail brokerdealers would oppose expanding
fiduciary standards to non-retirement
accounts, such opposition could be
tempered by the fact that the DOL rule
is now in place, firms have come into
compliance, and the costs of adhering
to differing standards of care may begin
to outweigh concerns that once existed.
It is also possible that an SEC rule in
this area could result in some paring
back (or even elimination) of the current DOL Rule.
Only time will tell. Meanwhile, consider that over the past several years,
securities regulators have adopted
a variety of new business practice
requirements, which, as a practical
matter, already have moved the needle
on the dial toward fiduciary standards
in the retail markets. For example, the
Financial Industry Regulatory Authority
(FINRA) has raised its expectations for

Regardless of whether the SEC
ultimately takes action to adopt a
fiduciary standard applicable to
retail broker-dealer advice, the
coming months promise to be
interesting from both a policy and
political perspective.
how broker-dealers manage conflicts;8
amended its suitability rule to explicitly include the recommendation
of investment strategies and explicit
recommendations to "hold" a security;9
and adopted a variety of new and
enhanced retail customer disclosure
requirements.10 Perhaps most telling,
in its 2015 Regulatory and Examination
Priorities, FINRA included a list of five
"recurring challenges," including this:
Putting customer interests first: A
central failing FINRA has observed
is firms not putting customers'
interests first. The harm caused by
this may be compounded when it
involves vulnerable investors (e.g.,
senior investors) or a major liquidity or wealth event in an investor's
life (e.g., an inheritance or Individual Retirement Account rollover).
Poor advice and investments in
these situations can have especially
devastating and lasting consequences for the investor. Irrespective of
whether a firm must meet a suitability or fiduciary standard, FINRA
believes that firms best serve their
customers - and reduce their regulatory risk - by putting customers'
interests first. This requires the firm

to align its interests with those of
its customers.11
Thus, in a very real and practical
sense, retail broker-dealers already are
operating under fiduciary-like regulatory expectations.

Conclusion
Regardless of whether the SEC ultimately takes action to adopt a fiduciary
standard applicable to retail brokerdealer advice, the coming months
promise to be interesting from both
a policy and political perspective.
Chairman Clayton's broad invitation for
public comment will no doubt rekindle
the long-standing debate over the
extent to which retail investors need
more protection, as well as the proper
role of the DOL in regulating securities markets. ▲

Holik is of counsel in the financial regulatory practice group of Shulman, Rogers,
Gandal, Pordy and Ecker in Potomac, MD.
He also maintains an expert witness and
consulting practice focusing on retail securities and bank-affiliated broker-dealers.

8. See FINRA Report on Conflicts of Interest (October 2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf.
9. See FINRA Regulatory Notice 13-31 (September 2013), available at http://www.finra.org/sites/default/files/NoticeDocument/p351220.pdf.
10. See, e.g., FINRA Regulatory Notice 17-08 (February 2017) (requiring enhanced disclosure of transaction-related information to retail customers for trades in certain fixed
income securities), available at https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-08.pdf.
11. FINRA 2015 Regulatory and Examination Priorities Letter at 1 (January 6, 2015) (Emphasis added), available at http://www.finra.org/industry/2015-exam-priorities-letter.

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BISA Magazine

https://www.finra.org/sites/default/files/Industry/p359971.pdf http://www.finra.org/sites/default/files/NoticeDocument/p351220.pdf https://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-08.pdf http://www.finra.org/industry/2015-exam-priorities-letter

Table of Contents for the Digital Edition of BISA Magazine - Quarter 3, 2017