SEC’s Gallagher: Fiduciary Rulemaking a ‘Runaway Train’
The Department of Labor’s much-anticipated fiduciary reproposal drew intense criticism Feb. 20 from SEC Commissioner Daniel M. Gallagher.Gallagher’s comments
, made at the “SEC Speaks in 2015” event, were particularly harsh — not only regarding the potential impact of the DOL’s proposed extension of ERISA’s fiduciary definition, but also on the process undertaken thus far in pursuit of its implementation.
Gallagher challenged “public reports of close coordination between the DOL and SEC staff,” saying that it was “nothing more than a ‘check the box’ exercise by DOL designed to legitimize the runaway train that is their fiduciary rulemaking.” He then turned his attention to last month’s leaked White House memo, declaring that the memo “took aim at every professional engaged in selling securities to investors.”
“To be blunt, the White House memo is thinly veiled propaganda designed to generate support for a widely unpopular rulemaking. Seven years after the height of the financial crisis, it is obvious that some remain intent on not letting it go to waste,” Gallagher explained.
Gallagher, who has been an SEC Commissioner since 2011, took issue with the memo’s assertion that “consumer protections for investment advice in the retail and small plan markets are inadequate,” noting that the “overarching statement is not accompanied by any analysis or study of the current protections investors receive from the regulatory oversight of brokers and investment advisers by the SEC and the SROs — in fact, it blatantly ignores this comprehensive regulatory oversight.”
Gallagher noted the memo’s selective citation of studies to support the claim that “the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year,” explaining that are already in place SEC and SRO rules “directly addressing the so-called perverse incentives referenced to in the memo.”
Addressing the memo’s claim that “the current regulatory environment allows fund sponsors and advisory service firms to create incentives for their advisors to recommend excessive churning … of retirement assets and to steer savers into higher cost products with financial payoffs for the advisor,” Gallagher remarked: “Far be it from me, as a mere SEC Commissioner, to second guess the White House securities law experts, but I do feel obligated to point out that our rules expressly prohibit brokers from churning client accounts, and the SEC and SROs have sophisticated tools designed to monitor for such activity.”
While being a fiduciary means acting in the best interest of the client, “it does not mean that all models where financial professionals are not fiduciaries are flawed. It also does not mean that labeling a financial professional as a fiduciary will solve the problem, especially when those problems have not been sufficiently identified and their causes studied,” Gallagher declared. “‘One-size-fits-all’ regulation, in practice, tends to end up as ‘one-size-fits-none.’ And when all is said and done, it means investors are presented with fewer choices and higher prices.”