Two industry trade groups and the Financial Industry Regulatory Authority came out recently with uniform best interest standards in an attempt to squelch what they say will be competing fiduciary plans to be issued by the Department of Labor and the Securities and Exchange Commission.
The Obama administration-backed DOL plan, which seeks to revamp the definition of fiduciary under the Employee Retirement Income Security Act, is out for a public comment period until July 21, with the department planning to also hold an August hearing on the proposal. The department anticipates a total of 140 days for public comments.
Administration officials have vowed that after comments are weighed, the plan will be approved in some form, despite legislative efforts to make DOL wait to issue its plan until the SEC acts on its own uniform fiduciary rulemaking.
Steve Saxon, chairman of Groom Law Group, said at the recent SPARK conference in Washington that DOL will push to issue a final rule by May 2016 so that it can have a rule in place before Jan. 20, 2017, the day the new administration takes office. If the DOL’s redraft is still “outstanding” by Inauguration Day, and a Republican candidate wins, that would present problems for the Obama administration-backed rule, Saxon said.
But a House Appropriations bill is threatening to nix funding for DOL’s fiduciary rulemaking. (See “Familiar Face Returns to SEC as Two Commissioners Plan Exit.”)
SEC Chairwoman Mary Jo White has said the agency is forging ahead in crafting its own fiduciary rulemaking under Section 913 of the Dodd-Frank Act, but that such a rulemaking is “just getting started.” However, industry officials are still trying to figure out exactly what the term “best interest” of the client standard means.
In introducing the Securities Industry and Financial Market Association’s best interest plan, Ken Bentsen, SIFMA’s president and CEO, said that such a standard would offer a “solution that works,” reflect what regulators have “been migrating toward” and avoid the current atmosphere where the SEC and DOL “are headed down separate and inconsistent paths” with their fiduciary plans.
SIFMA said its best interest standard “could be articulated, for example, through amendments” to existing FINRA rules, “as approved by the SEC,” and in a way that would be consistent “not only with SIFMA’s historical position” and with Dodd-Frank Act’s Section 913, but also with the “best interest standard set forth in the DOL’s [best interest contract exemption], and without certain conditions and requirements currently contained” in that exemption.
Bentsen said that SIFMA’s plan would apply across “all investment recommendations made to individual retail customers in all brokerage accounts, not just IRAs or other tax-deferred accounts.”
It would also:
Serve as a benchmark for, be consistent with and integrate seamlessly into the SEC fiduciary standard that ultimately emerges under Dodd-Frank Section 913.
Provide substantive best interest protections for retail customers in the interim.
Follow the traditional securities regulatory approach of establishing a rules-based heightened standard, including a robust disclosure combined with examination, oversight and enforcement by the SEC, FINRA and state securities regulators, and a private right of action for investors as exists today.
The Financial Services Roundtable proposed its own best interest standard, which creates a new prohibited transaction exemption (PTE) based on the investment advice exemption already allowed under the 2006 Pension Protection Act, which amended ERISA.
A rule based on the PPA exemption, FSR said, “would still require that financial professionals and firms act in the best interest of each customer and provide appropriate disclosures without such significant disruption to customers,” as it says the DOL rule would require.
DOL’s proposed rule, FSR said, “would substantially alter […] existing PTEs and many business models, and therefore impact millions of retirement savers.”