I’ve been writing about the Department of Labor (DOL) fiduciary rule for several years, but I may soon need to write the obituary.
In the most recent edition of Washington Insights, we discussed the latest — and likely final — chapter in the DOL fiduciary rule saga. On March 15, a three-judge panel of the Fifth Circuit Court of Appeals voted to vacate (or nullify) the rule. The DOL had until April 30 to appeal the verdict to either the same three-judge panel or to the full Fifth Circuit. But that deadline has passed, meaning that the rule should be officially vacated soon (unless a third party successfully intervenes in place of the DOL to defend the rule).
The AARP and the attorneys general of California, New York and Oregon filed motions in late April to intervene in the case in defense of the rule. On May 1, their attempt was rejected by the same three-judge panel that vacated the rule. The above attorneys general appealed the ruling striking down their attempt to intervene, and this appeal was subsequently denied on May 22.
What does this mean for the BIC exemption?
On May 7, the DOL issued guidance (Field Assistance Bulletin 2018-02) stating that it will not take any enforcement action against an entity that has been “working diligently and in good faith” to comply with the impartial conduct standards for transactions that would have been exempted in the best interest contract (BIC) exemption and principal transactions exemption. (These exemptions will be vacated along with the entire DOL fiduciary rule by the Fifth Circuit Court’s order.) This relief runs from June 9, 2017, until further guidance is issued.
The uncertainty about fiduciary obligations and the scope of exemptive relief, the DOL states, “could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors and financial institutions.” The DOL further observes that financial institutions “have devoted significant resources to comply with the BIC exemption and the principal transactions exemption, and may prefer to continue to rely upon the new compliance structures.”
Based upon these concerns, the DOL concluded that financial institutions should be permitted to continue to rely upon the temporary enforcement policy, pending its issuance of additional guidance. The DOL says it is convinced that this temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, individual retirement accounts (IRAs), and IRA owners.
Steve Saxon of the Groom Law Group noted that while the DOL fiduciary rule is “all but dead,” the fiduciary status of service providers offering advice is not: “If fiduciary advice given results in the payment of compensation, there is a prohibited transaction. But with the vacating of the fiduciary rule, there is no longer an exemption — hence the need for relief. The nonenforcement policy should be followed by an exemption taking the place of the BIC exemption.”
While it is theoretically possible that the DOL could appeal the Fifth Circuit’s original decision to vacate the rule directly to the Supreme Court by June 13, this is very unlikely in light of the DOL’s issuance of this guidance. The DOL could also issue subsequent guidance revisiting portions of the rule.
SEC standards of conduct come into focus
Full attention now turns to the Securities and Exchange Commission (SEC) proposals for standards of conduct for broker-dealers and investment advisors that were released on April 18. The SEC said in its accompanying press release that the proposals were “designed to enhance the quality and transparency of investors’ relationships with broker-dealers and investment advisors while preserving access to a variety of types of advice relationships and investment practices.” The proposals carry several key implications:
- Under proposed Regulation Best Interest (BI), a broker-dealer would be required to act in the best interest of a retail customer when giving them a recommendation of any securities transaction or investment strategy involving securities. Regulation BI is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.
- The SEC also proposed an interpretation to reaffirm and, in some cases, clarify the SEC’s views of the fiduciary duty that investment advisors owe to their clients.
- Next, the SEC proposed to help address investors’ confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — in other words, a customer or client relationship summary (CRS). Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures. For advisors, additional information can be found in Form ADV. For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation BI.
- Finally, the SEC proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors. Investment advisors and broker-dealers would also need to disclose their registration status with the SEC in certain retail investor communications.
Initial reaction to the SEC proposals was mixed. Many financial services firms had maintained all along that the SEC (rather than the DOL) was the proper source for this type of guidance, and expressed support for the new standards of conduct for broker-dealers and investment advisors. Some consumer groups were worried that the SEC rule relies too much on disclosure; while brokers would be required to disclose and mitigate conflicts, the rule would not require them to broadly eliminate them.
What happens next?
We are now in the midst of a 90-day public comment period (ending Aug. 7) for individuals and groups to express their opinions on the SEC rule, including whether they have identified any potential problems or ambiguities in the proposals that the SEC might clear up in a final version.
Some individual states have already taken steps to institute their own fiduciary rules in light of the uncertainty about a federal policy. We’ll have to wait and see how many states will follow through on their individual rules or whether they will possibly coalesce around the SEC’s proposals in final form.
The DOL fiduciary rule was well-intentioned, but ran into much controversy over its complexity and cost, the concern of the financial services industry that it would adversely affect the availability of certain products and services (including advice to lower-and middle-income investors), and its apparent encouragement of litigation as an enforcement mechanism for certain provisions. The SEC has now stepped front and center with its proposed standards of conduct for broker-dealers and investment advisors. It remains to be seen whether a final version of the proposals will satisfy all concerned parties.
We’ll keep you posted.
- PlanSponsor, “DOL issues temporary enforcement policy following 5th circuit decision on fiduciary rule,” Rebecca Moore, May 7, 2018
- ThinkAdvisor, “DOL announces fiduciary rule enforcement policy,” Melanie Waddell, May 7, 2018
- Securities and Exchange Commission, “SEC proposes to enhance protections and preserve choice for retail investors in their relationships with investment professionals,” April 18, 2018
Blog header image: happymay/Shutterstock.com
DOL fiduciary rule is all but gone by Invesco US.