Saturday, April 28, 2018

(Too) Great Expectations?

My schedule – and aversion to crowds – means that I rarely see a new movie the first weekend it comes out (a rare exception – Avengers: Infinity War this weekend).

While this means that there are times when I’m the only one in the office the following Monday who hasn’t seen the latest blockbuster (and thus can’t offer an opinion), more often than not, it’s also spared me the time, money (and potential aggravation) of rushing out to see a movie that is more likely to be up for a “Razzie” than an Oscar.

However, I’ve also found myself in situations where the hype surrounding a new blockbuster is so compelling that it builds up my expectations beyond the reality – leaving me… underwhelmed.

Doubtless that was the sense of many in reading the Best Interest Regulation proposal published by the Securities and Exchange Commission last week. Those who had hoped that a uniform fiduciary standard might emerge were surely disappointed, as were those who might have anticipated that the SEC’s proposal might step up and fill a gap potentially created if the 5th Circuit’s ruling was unchallenged. There is, of course, an irony in a Regulation Best Interest that doesn’t define “best interest,” and understandable concerns that a standard that leans so heavily on “reasonable” tests is portrayed as an objective standard.

On the other hand, all will surely find comfort in the acknowledgement that “cheapest” isn’t deemed equivalent with “best,” and some will certainly be reassured by the “principles-based” emphasis, not to mention the acknowledgement of the Labor Department’s fiduciary rule and Best Interest Contract Exemption (BICE) and the latter’s stated objectives as consistent with Regulation Best Interest, even if the latter doesn’t create fiduciary status.

Odds are, if you liked the Labor Department’s fiduciary rule and its structures, you won’t be satisfied with the SEC’s take. On the other hand, if you thought the DOL went too far, the SEC’s proposal might well be more in line with your expectations. And yet, the lingering uncertainty as to the when – or if – of the SEC’s response – and the (at last until lately, relative) certainty of the Labor Department’s approach has led many firms to institute processes and procedures suited for the latter, not the possibility of the former.

Arguably, the vast majority of advisors committed to serving workplace retirement plans were well along the path of satisfying ERISA’s compensation strictures, and the Best Interest Contract Exemption (BICE) – with all its shortcomings – provided a means for the rest to work their way there. What many found most confounding about the Labor Department’s fiduciary rule was its extension of oversight to IRAs, notably the enormous IRA rollover market – and, in that regard at least, the SEC proposal seems to be reasserting its authority. Will that be an area of “compromise” between the agencies? Time will tell.

Ultimately, the current SEC proposal – and bear in mind, this is really just a starting point – is bound to disappoint more than it pleases, if only because it introduces an element of uncertainty at a particularly critical time. Many, having waited nearly a decade for the proposal to emerge, doubtless hoped it would be more proscriptive in scope and/or detail. Indeed the industry commentary thus far seems to be a sense that it feels half-finished, rushed to press, perhaps even opportunistic in its timing, what with the ink on the 5th Circuit’s decision still damp. Let’s face it, even the SEC commissioners who supported its publication did so with cautioning commentary, if not outright reluctance.

That said, having waded through the 1,000-plus pages twice and half again, one can’t be help but be struck by the amount of space in those 1,100 pages dedicated to questions from the proposal’s authors – questions that merit consideration and thoughtful response.

The work may be unfinished, it may be unsatisfying in scope or clarity, but we now have a window (albeit a short one) – and an invitation – to comment, inform, and yes, perhaps even remedy those shortfalls.

- Nevin E. Adams, JD

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