DOL and SEC Likely to Release New Fiduciary Rule by Year’s End

March 19, 2018 by Melissa L. Lucar, Esq.

The Department of Labor (DOL) and Securities and Exchange Commission (SEC) announced earlier this year that they are collaborating in creating a standardized investment advice rule that would replace Labor’s fiduciary rule. Recently, the agencies announced that they are preparing to simultaneously release an updated universal fiduciary rule by this fall.

The former head of the Department of Labor’s Employee Benefits Security Administration (EBSA) indicated that he believes it reasonable that both agencies agree on a new rule before year’s end. Brad Campbell, who is now with the firm Drinkler Biddle & Reath, said that it is a reasonable estimate” for the DOL and SEC to come together on a universal fiduciary standard.
Late last year, industry experts indicated that they were optimistic that Labor and the SEC would work together in developing an industry-standard fiduciary rule. At that time, CEO of SIFMA, Ken Bentsen said, I think they’re committed to doing this. That is different than in the prior administration where the commission felt they had to stand aside.
Most industry analysts have said they prefer one standardized rule across all financial sectors, and the SEC is looking to deliver on that concept. Many insiders believe that it makes sense that both agencies are working on the same timeline.
On January 2, the DOL announced that they would delay implementation of key aspects of their rule for 18 months while the SEC and state regulatory bodies weighed in on a standardized rule. At the heart of the delay was the compliance date for the rule’s Best Interest Contract Exemption and the Principal Transactions Exemption. The delay moved the compliance date for certain amendments from January 1, 2018 to January 1, 2019.
With Preston Rutledge taking over EBSA at Labor , along with the swearing in of new SEC Commissioners Hester Peirce and Robert Jackson, gives the SEC a full commission for the first time since 2015 and bodes well for inter-agency cooperation. Many experts also see this as an indication that new fiduciary rule negotiations will begin in earnest. Assistant Secretary Rutledge has vast knowledge and familiarity of employee benefit programs, and it is expected that he will lead the effort in working with the SEC commission on drafting a universal rule.
Although the rule was created under the Obama administration, new political leadership and a new direction for regulatory agencies are ultimately taking the rule in a new direction. This new focus will require taking portions of the rule that were scheduled to be implemented to be discussed anew and likely reformed before any agreement can be made. The original rule had many aspects that were never properly vetted and reviewed before deciding to release compliance requirements for specific parts of the rule. Those sections of the rule will need to be reformed or merged as part of a universal rule package.
The timeframe with which the SEC has to work within may get extended, as the Fifth Circuit Court of Appeals decided to shelve their decision on whether Labor overstepped its authority in creating a fiduciary standard. The Federal appeals court decided on January 22 to delay their ruling to allow the DOL time to review their rule. Many see this as the court stepping aside while Labor and the SEC hammer out a new rule that may make their decision moot.
While the DOL is the only federal agency to release a fiduciary rule, there are a number of state rules in place that run contradictory in some facets. It is expected that the DOL and SEC will work with state regulatory agencies to ensure that the preemptive facets of the reformed fiduciary rule to not overstep state laws. Without federal and state agencies coordinating on a new rule, it will become more challenging for the financial industry to comply with conflicting standards.
Although it appears the stars are aligning, insiders say that under Section 913 of Dodd-Frank, rulemaking leading to a universal rule will still be strewn with roadblocks. However, others believe that because the DOL has already complied with and addressed point-for-point with the requirements of Section 913, the coordinated rulemaking path should be much easier.
DOL officials have already confirmed that they could further delay the rule if more time is needed for the agencies to agree on a new standardized rule.