As the Securities and Exchange Commission’s (SEC) Regulation Best Interest rule comment period came to an end, the Department of Labor (DOL) was still busy planning a rewrite of their fiduciary guidance.
Although the DOL’s Obama-era rule was vacated last spring by the U.S. Court of Appeals for the 5th Circuit, the agency is putting together newly revised guidance to apparently supplement the final SEC broker rulemaking package.
On April 8, 2016, Labor replaced a regulation dating back to 1975 which defined who is a fiduciary, under Section 3(21)(A)(ii) of the Employment Retirement Income Security Act (ERISA), as someone who provides investment advice in exchange for a fee or other compensation.
However, that new regulation was vacated in Chamber of Commerce v. Department of Labor, and now, Labor is considering its regulatory options after that defeat.
The SEC announced in its fall 2018 agenda that its final advice standards package for advisors and brokers would be coming next September. Industry experts predict that the SEC is taking its time reviewing public comments, so to allow time for Labor to work on refining their fiduciary guidance, expected to be released around the same time. Most think this is a good indication that the agencies are working together to produce a standardized rule package.
Some industry trade groups believe that Labor is working to revive the portion of its vacated rule that requires advisors to become fiduciaries when they sell products and want to receive variable compensation.
Most retirement advisors are still relying on Labor’s temporary enforcement policy, where it states that it would not enforce ERISA prohibited transaction rules for those who act as a fiduciary.
It is the hope of many that the two agencies will come together to build a framework for compliance with Reg BI, so to offer more clarity to an industry relying on temporary rules and guidance.
However, industry stakeholders are also hoping that the standard won’t be as stringent as the DOL rule, with its now-vacated best-interest contract exemption. Instead of creating a rule that states that a representative cannot take his or her personal financial interest into account, it is the hope that it follows preliminary SEC guidance that states an investment advisor cannot subordinate his or her client’s interest to their own interests.
As new investment products enter the marketplace, Labor is looking to step up enforcement activity for a variety of issues, including abandoned retirement plans, compliance with prohibited transactions, exemptions, and provide accurate information about new product offerings.
While the DOL will continue to target unlicensed individuals or false offerings, it will also focus more on new funds that are coming online, as more investors pour capital into them, while also compiling data that it can use in preparing its new guidance.
So, it appears the agency is back in the game, now working on new broker and advisor guidance in conjunction with the SEC’s Reg BI and Form CRS. It would be prudent for Broker-Dealers and their representatives to keep a proactive eye on what both Labor and the SEC are cooking in regards to their rulemaking process, while ensuring they stay up-to-date and compliant with all interim guidance.
