WSJ Commentary: Leave Broker Disclosures to the SEC

Paul S. Atkins and Gregory F. Jacob write in the Wall Street Journal:

The Securities and Exchange Commission and the Labor Department have both asserted the authority to regulate investment brokers. The two of us—a former SEC commissioner and a former labor solicitor—have a word of advice for Labor concerning its recent efforts to adopt new rules on broker conflicts of interest: It’s time to pass the baton.

The SEC is the primary regulator of brokers. In Section 913 of the Dodd-Frank Act, Congress tasked the SEC with studying what regulatory standards should be applicable to brokers and investment advisers. It also granted the agency power to enact regulatory action it determined was necessary.

But a curious thing happened when the Obama administration set out to fulfill this mandate. Despite its superior expertise and express congressional directive, the independent SEC stepped aside and ceded the field to the politically controlled Labor Department.

The resulting “fiduciary rule” was a plaintiff lawyer’s dream, filled with litigation-fostering ambiguities and the promise of lawsuits in state court. In March, the Fifth U.S. Circuit Court of Appeals vacated this rule, citing its bizarre architecture and unprecedented intrusion into the SEC’s statutory domain.

Under the new administration and the leadership of Chairman Jay Clayton, the SEC has reasserted its authority. Earlier this month, the agency voted to tighten disclosure standards. The proposed regulation would implement a single standard for U.S. brokers aimed at preventing them from giving advice that serves their own interests rather than those of their clients.

A lack of transparency from brokers can skew financial advice and cost workers hard-earned retirement savings. But whereas the Labor Department’s limited statutory authority forced it to adopt a hopelessly convoluted regulatory structure to reach just the narrow slice of broker-dealer conduct that pertains to retirement plans, the SEC is able to supply a single, coherent standard of conduct for all brokers. This protects all investors at all times, while avoiding the costs, conflicts and confusion of a bifurcated regulatory regime.

Though the SEC’s solution to the broker transparency problem enhances fairness and investor certainty, it is not perfect. For example, in its current form it fails to delineate fully brokers’ responsibility to act in the “best interest” of investors. It can and should be improved with more investor testing and data-gathering. Once the SEC’s work is done, the Labor Department will be in a far better position to assess whether gaps remain for it to fill.

But the regulatory tussle may not be over yet. The Labor Department must now decide whether to appeal the Fifth Circuit ruling to the Supreme Court. Will the department continue its legal fight to uphold the Obama-era fiduciary rule, or will it accept the judges’ determination and allow the SEC to take the lead in implementing a regulation that supplies a uniform, consumer-protective standard of conduct for all U.S. brokers?

For now, Labor Secretary Alex Acosta should let the Fifth Circuit’s decision stand, and redirect his department’s energies to working collaboratively with the SEC to support its refreshingly straightforward and thoughtful rule-making process.

Mr. Atkins served as an SEC commissioner, 2002-08. Mr. Jacob served as solicitor of labor, 2007-09.

This opinion piece originally appeared in the WSJ print edition on April 3: