Remember the controversial fiduciary rule passed by the Obama era Labor Department. It states that financial advisers must put their client's interest ahead of their own. Secretary of Labor Alexandra Cousta has said the rule will kick into effect on June nine, but don't circle that on your calendar yet. The final implementation of the rule doesn't go into effect
until January one, and a luck can happen. In February, President Trump signed an executive order to try to roll back the fiduciary rule, with Republican Representative and Wagner of Missouri, who has been fighting to kill the rule, standing behind him. You are returning the American people, lowe mill income investors and retirees their control of their own retirement saving. This is about a main street and I am. It's been
a labor of love for me. The Securities and Exchange Commission was given the authority to promulgate a fiduciary rule, and now it appears the sec is considering reviewing the responsibility that brokers have to their clients, perhaps giving the finance industry and opportunity to chip away at the rule, cracking down on conflicts of interests. We have two experts in the area with us, John Coffee, professor at Columbia Law School and Jill Fish, professor at the University of
Pennsylvania Law School. Jack as I said, this was a controversial rule from the start. Let's go back and explain why the Obama administration believed it was necessary and whether you agree with it. Okay, Basically, we need to understand that today, under current law, an adviser who provides retirement investment advice to a client, whether it's a four oh one K holder and i RA A holder, or some other kind of client, is not a fiduciary of that client.
His only obligation is not to recommend products to the client that are clearly unsuitable because there is much more risk or it's totally inconsistent with the client's retirement needs, but doesn't have to act in the best interests of
the client. That means, for example, he could give imprudent advice, negligent advice with immunity, or more typically, he could give disloyal self inner to advice by recommending, for example, a mutual fund that was sponsored by his employer, a large broker dealer which charges much higher fees than other funds
that are substantially equivalent. That would violate a fiduciary standard, which always requires that you act in the best interests of your client, but it would not violate the suitability standard. The Department of Labor standard would effectively say you couldn't act when you had a conflict of interest. You couldn't recommend any product if there was a product that might be superior to this. This would change substantially practices in
the industry. In fact, it already is changing practices within the industry, but it's bitterly controversial. One last point. Under President Obama, the White House Council of Economic Advisors estimated that each year Americans pay seventeen billion in unnecessary fees because their advisors need not act as fiduciaries. That's a pretty high cost, and of course it means that the industry would lose a good deal of money if the new rule went into affect. Jill, what's the argument against
this best interest standard? It sounds like from an investor standpoint, a good thing. Um, well, it's certainly the case that investors are vulnerable, and historically there have been many instances of brokers taking advantage of their clients. The challenges that the fiduciary standard is a very high one. We tend to think of people like doctors and lawyers acting as fiduciaries, and even in those cases, there is the potential for
conflicts of interest. UH Financial advice brokerage. That's a business, and brokers need to be compensated for providing investment advice to their clients. But virtually any form of compensation creates the potential for a conflict of interest, and that's what brokers are facing as they try to restructure their accounts to deal with the potential implications of the fiduciary rule.
One more point before we move on. That seventeen billion dollar figure that Jack quoted, that's a very suspect figure. It's based on antiquated data the number of questionable assumptions. So people are throwing around that number suggesting, well, you know, gee, this is something some huge amount the brokers are taking away from their customers. But it's quite likely that that number is overstated. Jack, do you want to respond quickly
in thirty seconds? Department of Labor created a special safe harbor to make this rule practical and feasible. They say that any broker dealer that enters into a best interest
contract is exempt from their poduce sheary rule. That means there is a practical way to comply, and we're seeing some brokers take that option because many brokers now are moving from a commission basis to their client relationships to an annual fee basis, and that annual feed basis can more easily comply with the best interest contract exemption under
the Department of Labors fiduciary rule. I don't know when the seventeen billion is too higher too low, but I think there is a substantial cost to investors on the current system. We've been talking about the fiduciary rule passed by the Obama era Labor Department, which states that financial advisors basically must put their client's interest ahead of their own, and the Secretary of Labor, Alexander Acosta, has said the rule will go into effect on June nine. At least
the beginnings of the rule. We've been talking with Professor Jill Fish of the University of Pennsylvania Law School and Professor John Coffee of the Columbia Law School. Jill, since the Department of Abor rule is on its way into effect. What can the SEC do in light of the fact that that rule is ongoing? I mean, are they on
two separate tracks? Uh? In fact, they are. And one of the issues that's currently pending before Congress is the extent to which UH Congress should override the Department of Labor and make UH this regulation firmly within the SEC's hands. And to my mind, that makes a lot of sense. The SEC has been in the business of protecting investors since nineteen thirty four. It's a really in the best position to decide how to protect them with respect to
retirement investing. And it also makes sense to have a single standard applied to broker advice, whether it's it's with respect to retirement investing or somebody's other assets. You wouldn't want two different standards to apply and the broker to say, well, Gee, all of a sudden, i'm investing you to with respect to this account, now my obligations are different. That would
be incredibly confusing for investors. Jack Um is the fact that that some of these Labor Department rules are going to go into effects on June nine, others not until January one, and the fact that the SEC is looking at this going to produce kind of a marketplace with LASH where there will be some rules in effect and
potentially they will disappear a few months down the road. Well, essentially, the SEC has had this issue before it since the issue since Dodd Frank was passed in two thousand and ten, and they've been paralyzed for the last seven years. They've been unable to side to decide what single uniform rules should apply. There's a higher standard applicable to investment advisors and there's a much lower standard applicable to brokers, and they've been politically divided. We have now reached a point
where they will no longer be politically divided. There will be a clear Republican majority. And my fear is that in this special area the SEC may move from being divided and paralyzed to being politically captured. Because this is a tremendously important issue. Too much of the brokerage industry that wants to continue under the softer suitability rule and doesn't want anything that says they might have to recommend
the product that's most attractive to their claim. So this is not I think the area where the SEC, who's going to distinguish itself as the investor's advocate, Jill, Isn't that true because President Trump also has been trying to get read get rid of additional regulations. There's a lot of pressure from Republican lawmakers like A Wagner of Missouri on the SEC to do away with these kinds of rules. There certainly is a lot of political pressure, and the
fudiciary rule has been controversial from the outset. But ironically a lot of the big Wall Street firms are now finding the fudiciary rule is less problematic than they thought, in part because in many cases they're going to wind
up charging their client's higher fees. Eliminating commission based accounts in many cases will mean that the customer pays more and UM for the small customer, what the big firms are doing is simply eliminating those accounts, saying they won't take small investors, essentially because it's not economic to service very small accounts under a UM assets under management or
a flatbe type of structure. So UM. It's those types of concerns that I think the SEC is really in the best position to analyze, Jack, given the views you've expressed expressed, did you take any comfort when Alex Acosta, the Labor Secretary, said a few days ago that he was going to let this rule take effect. I think some people have been anticipating, or perhaps hoping, that he would either delay it further or or move to block it all together. Well, candidly, I did think he was
probably going to delay it. He said there was no principal basis for that, and let's take him at his word. It was a principal decision. That rule won't really bite until January one of next year, but it will be applicable. There are changes going on in the industry. I think some of these are for the best. It might be that some clients will leave brokers who don't want small accounts, but there are plenty of other brokers who do want
small accounts. I don't think we can assume that people who want services won't get them, because the industry is extremely competitive. What I think we will see is that they will have to be more attention given to the best interests of the client. And frankly, brokers are subject
to enormous conflicts of interest. They are always selling proprietary products of their employers, such as mutual funds, and if they can ignore that, their employer is selling a more expensive product than the competition, the interests of investors suffer. Let's talk about timing here, because the SEC's first step, I take it would be getting feedback. How long would it take to put a rule into effect? The process varies tremendously, and it varies in part because the SEC
itself is still in transition. Jack mentioned the fact that we're likely to see in the near term a Republican dominated sec SEC, but that's still a work in progress as well. I don't think it will take very long for the SEC to issue some sort of concept release or some sort of request for common and uh sort of take the temperature of the industry. And I think, given the changes that brokers are making in response to the prospect of the Fiducier rule, gathering that information would
be an important and valuable first step. And Jack, just to be clear, what would happen if the SEC issues a rule that is directly conflicting with what the Labor Department has done? What will be the state of We're likely to see some litigation in the courts, but it's quite arguable, easily arguable, that the SEC has primary jurisdiction.
It also might persuade Congress. Remember, we have a Republican Congress that could easily pass the bill to President Trump would quickly sign, giving the SEC jurisdiction or endorsing the SEC's position. So both the courts and the White House and Congress will all get into this game because they're just too important interests for them to ignore it. And Jill, the federal judge did deny a lawsuit brought by industry
trade groups seeking to overturn the fiduciary rule. So how much of an option are the courts in this in this instance? Well, what Jack's talking about is the court's weighing in if there's a potential conflict between the SEC's regulation and what the Department of Labor has done. And Jack's also right, it's likely that Congress would intervene as well. Uh, some of the bill currently pending for Congress would give the SEC the explicit authority to overrule the Department of
Labor if it so chooses. Well, I'm sure we have not heard the last of the fiduciary rule, and we hope that you both come back on Bloomberg Law with us again the next time the issue comes up. That's Jill Fish Professor at the University of Pennsylvania Law School and John Coffee Professor at Columbia Law School.