The political landscape in Washington has changed in the
year since the SEC's best-interest standard took effect, which could mean
different interpretations and enforcement practices from regulators. But the
attention among investment-advice stakeholders this month is focused on the
Department of Labor, as it announced plans to issue a proposed rule that could
broaden who's considered a fiduciary under ERISA.
The rule-making, unveiled as part of the Labor Department's
semiannual regulatory agenda June 11, would amend the regulatory definition of
the term fiduciary "to more appropriately define when persons who render
investment advice for a fee to employee benefit plans and (individual
retirement accounts) are fiduciaries" within the meaning of the Employee
Retirement Income Security Act and the Internal Revenue Code, according to a
Labor Department explanation.
Moreover, the amendment would "take into account
practices of investment advisers, and the expectations of plan officials and
participants, and IRA owners who receive investment advice, as well as
developments in the investment market- place, including in the ways advisers
are compensated that can subject advisers to harmful conflicts of
interest," the department said.
"There are a lot of career people at the DOL still
working there and it's not clear to me that their views would have necessarily
changed just because of the 5th Circuit's action," said Joshua A.
Lichtenstein, an ERISA and benefits partner in New York who heads Ropes &
Gray LLP's ERISA fiduciary practice. "So I am expecting to see a pretty
fulsome rewrite of the definition of who is a fiduciary."
In 2018, a three-judge panel at the 5th U.S. Circuit Court
of Appeals in New Orleans vacated a Labor Department rule, commonly known as
the fiduciary rule, in a 2-1 decision because it said the department exceeded
its legal authority.
The fiduciary rule, finalized in 2016 under the Obama
administration, broadened the definition of when a person or entity was taking
on fiduciary responsibilities and replaced the five-part test used to determine
whether an investment professional or financial institution is a fiduciary.
The Labor Department last year under the Trump administration
reinstated the five-part test and in the preamble to an investment-advice
exemption that took effect in February, said the five-part test applies to
"I think there's concern in the department and in
general that people go from retirement plans to IRAs — a retail environment
where there are higher costs, less protections from conflicts of interest and
there isn't a fiduciary standard," said Fred Reish, a partner in Faegre
Drinker Biddle & Reath LLP's benefits and executive compensation practice
group. "It's not so much about a person 30 years old leaving their job and
putting money in an IRA, this is really about baby boomers retiring in a defined
As it currently stands, the five-part test makes it
"too easy" for financial firms to avoid fiduciary obligations under
ERISA, said Barbara Roper, Pueblo, Colo.-based director of investor protection
at the Consumer Federation of America.
She would like the Labor Department to ensure all rollover
recommendations are considered fiduciary investment advice and close the
"loopholes" in the fiduciary definition.
But much like with the 2016 rule, Ms. Roper expects the
Labor Department to face a legal challenge if it broadens the fiduciary
The Employee Benefits Security Administration takes
"judicial decisions into account when pursuing rule-making," A Labor
Department spokesman said in an email. "The 5th Circuit's decision will
shape our thinking on approaches to these issues."
Jason Berkowitz, chief legal and regulatory affairs officer
at the Insured Retirement Institute in Washington, expects the Labor Department
to expand the definition to include rollovers. "We don't feel that that's
an appropriate move, but we'll reserve judgment until we see exactly what they
propose, and we'll take a thoughtful and measured approach to reviewing it and
analyzing it and providing feedback through the regulatory process," he said.
It's far too soon to say whether the rule will face a legal
challenge, Mr. Berkowitz added, but "given the stakes here all options do
have to remain on the table and we'll wait and see how things play out."
The previous case decided in 2018 was filed by business
groups such as the U.S. Chamber of Commerce, the Financial Services Institute,
the Financial Services Roundtable, the Insured Retirement Institute and the
Securities Industry and Financial Markets Association.
Stakeholders are also watching how the SEC, with Gary
Gensler at the helm since April, will enforce its best-interest standard, known
as Reg BI.
The best-interest standard was the centerpiece of a package
designed to address the obligations of broker-dealers and investment advisers
when they provide recommendations or investment advice to retail investors. It
was adopted in June 2019 and went into effect June 2020. Shortly before the
rule package took effect last year, the SEC said initial examinations would be
less onerous and focus on "good faith" efforts because of the
disruptions caused by the COVID-19 pandemic. In January, it announced the scope
of its examinations would expand.
During testimony before the House Financial Services
Committee in May, Mr. Gensler said it's important that "investors actually
have brokers take their best interest at heart and that's what we're going to
do through examination and enforcement, (and) guidance to ensure that that rule
is fully complied with as written."
Because the rule doesn't have specific definitions of terms
like "best interest" and "conflicts of interest," the SEC's
interpretation will be what's enforced, Mr. Reish said. A Democratic-led SEC is
likely to focus more on the cost differentials investors pay and the different
commission incentives financial professionals receive for giving advice than a
Republican-led SEC would have, Mr. Reish added.
"Republicans still want to protect investors — it's
just, 'Where is the line drawn and how heavily should financial intuitions be
regulated?'" he said.
Ms. Roper said Reg BI is "too weak and undefined to
deliver the promised protections of a true best-interest standard backed by
meaningful restrictions on harmful incentives," in an April letter to Mr.
Gensler. She would like the SEC to clarify "best interest" and state
how it will determine whether firms are adequately mitigating conflicts of
Others, like Mark Quinn, San Diego-based director of
regulatory affairs at Cetera Financial Group, Inc., a network of independently
managed broker-dealers, said Reg BI defines best interest well enough so firms
know what's expected.
All the while, through the first year of Reg BI, there
haven't been any major compliance issues, stakeholders said.
Brynn Rail, a partner in the asset management group at Ropes
& Gray, does not expect the new administration to make any major changes to
Reg BI. It wasn't included in the SEC's semiannual regulatory agenda released
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