From the November 2017 issue of Investment Advisor • Subscribe!

Trump Names New EBSA Chief as Wagner Bill Gets House Panel Nod

A delay and changes to Labor's fiduciary rule are likely in the offing as SEC crafts its own rule and chief Clayton worries about state fiduciary laws

Activity surrounding the Labor Department's fiduciary rule continues unabated. At press time in mid-October, the Trump administration nominated Senate Finance Committee senior counsel Preston Rutledge to head Labor's Employee Benefits Security Administration, the position held by Phyllis Borzi, architect of Labor's fiduciary rule during the Obama administration.

If confirmed, Rutledge will be instrumental in shepherding through any change that Labor makes to its fiduciary rule. Industry officials anticipated that Labor would officially delay the fiduciary rule's Jan. 1, 2018, effective date by 18 months by the end of October.

Rutledge's appointment to head EBSA would “fill a leadership vacuum at that sub-agency and allow the DOL to move forward with any changes” to the fiduciary rule, said Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company.

“In the meantime, DOL is very likely to move ahead with an extension of the transition period impacting the [rule's] best-interest contract exemption and other parts of the rule to July 1, 2019,” Thompson added, which “could result in a legal challenge by consumer groups.”

On the Senate Finance Committee, Rutledge's duties include employee benefits, retirement issues, tax-exempt organizations, health tax issues, and the tax provisions of the Affordable Care Act.

Prior to joining the Finance Committee, Rutledge served as a senior tax law specialist on the headquarters staff of the Tax Exempt and Government Entities Division of the Internal Revenue Service, and as a senior technical reviewer in the Qualified Pension Plans branch of the IRS Office of Chief Counsel.

Rutledge has been in private law practice as an employee benefits counselor and ERISA litigator.

A day before Rutledge was nominated on Oct. 13, Rep. Ann Wagner's bill to repeal the Labor's fiduciary rule, the Protecting Advice for Small Savers Act of 2017, H.R. 3857, passed out of the House Financial Services Committee.

The bill, which passed by a vote of 34-26, now goes to the House.

Wagner, R-Mo., introduced her bill, which keeps a fiduciary rulemaking under the Securities and Exchange Commission's jurisdiction, on Sept. 27.

Wagner's PASS Act establishes a best-interest standard for broker-dealers and repeals Labor's rule, “period. Full stop. And it gets the Department of Labor out of the broker-dealer space.”

Other bills like Wagner's that aim to repeal Labor's fiduciary rule or set new standards for investment fiduciaries have passed out of the House in recent years “only to die in the Senate,” Thompson said. “I believe this [PASS Act] is no different,” he adds, as “it is highly partisan and would face a Democratic filibuster in the Senate and likely fail.”

But SEC Chairman Jay Clayton told Wagner during testimony before the House Financial Services Committee on Oct. 3 that the agency is “working on” a fiduciary rule proposal and that “a lot of the themes” that she outlined in her PASS Act “are the themes that I have.”

Investors, Clayton said during his testimony, “should have choice — what type of account they want, what type of relationship.” There should be clarity. “I recognize that there's not the kind of clarity that there should be in the marketplace,” he added. “There ought to be consistency with us and the Department of Labor. We can't have asymmetric standards.”

Also, “we have to cooperate.” With Labor. “They have a mandate, we have a mandate; they’re not the same, but we can cooperate and get there, I believe … The devil is in the details, and we’re working on it.”

Trouble Ahead With State Fiduciary Laws?

Clayton also told the lawmakers that he's concerned about the state fiduciary standards that are cropping up, after Wagner probed him about the “patchwork” of state fiduciary laws, pointing specifically to the one promulgated in Nevada.

As it stands now, fiduciary regulation is in the works in New York, New Jersey, Nevada and Massachusetts.

Nevada's law is unique in that it not only says advisors are fiduciaries when dealing with retirement and non-retirement plans, but “expressly deals with disclosure, recordkeeping, as well as an ongoing duty to monitor that potentially goes beyond, and differs from, what's required under federal law, though the anticipated regulations should clarify these issues,” said George Michael Gerstein, an attorney with Stradley Ronon Stevens & Young in Washington.

Nevada held an Oct. 6 workshop to solicit comments on the laws adopted through Senate bill 383, which among other things, imposes a fiduciary duty on broker-dealers and investment advisors.

Added Gerstein: “I hope the anticipated regulations will clarify whether and how Nevada's newly revised law is intended to differ from current obligations at the federal law [level], whether that be the securities laws or ERISA.”

At the workshop, in which the Nevada Securities Division “allowed the industry and attendees to comment,” and “just listened,” added Larry Stadulis, partner at Stradley Ronon.

Lisa Bleier, managing director of Public Policy and Advocacy at the Securities Industry and Financial Markets Association, told the Nevada Securities Division during the Oct. 6 workshop that SIFMA believes “a uniform national standard is in everyone's best interest,” and that the group is “concerned that a state-by-state approach would subject financial professionals and firms to a confusing and potentially contradictory array of requirements and further muddy the waters for consumers trying to determine their relationship with their broker.”

For his part, Fi360's Thompson anticipates “a legal challenge by industry groups of any rules coming out of Nevada's securities division, especially on preemption of federal securities law.”

Any “major changes” to the fiduciary standard for advisors “will reside with the SEC and DOL, not elsewhere,” Thompson argues.

Lots of Moving Parts

As to the ultimate fate of Labor's fiduciary rule, there's “no shortage of scenarios in play,” Thompson said, but any change is most “likely to occur at the SEC and DOL than on Capitol Hill or in the courts.”

Indeed, a decision has yet to be rendered in the 5th Circuit's review of a lower court decision upholding the DOL's rule. That's the case brought by the nine plaintiffs — including SIFMA, the Financial Services Institute, and the U.S. Chamber of Commerce — against Labor's fiduciary rule.

Meanwhile, oral arguments have been scheduled for Dec. 8 in the appeal brought by the National Association for Fixed Annuities over a federal court's denial of NAFA's bid to block the fiduciary rule.

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