Labor Secretary Alexander Acosta confirmed in early May that the Department of Labor would indeed issue its own fiduciary-related rules. Exactly what form they’ll take remains unclear, but industry officials’ educated guesses surmise that a full-blown fiduciary rule like the one vacated by an appeals court last year is not in the works.
During his testimony before the House Education & Labor Committee on May 1, Acosta said that Labor is collaborating with the Securities and Exchange Commission as it works on its advice-standards package, which includes Regulation Best Interest, and that “based on our collaborative work, we will be issuing new rules in this area.”
SEC Chairman Jay Clayton signaled to reporters after his comments at the Investment Company Institute annual conference in Washington a day later that it wouldn’t be long until Reg BI was before the commission for a vote.
“Whatever DOL does, and they will do something, it will be ‘in harmony’ with Reg BI,” Steve Saxon, who specializes in Title 1 of the Employee Retirement Income Security Act at Groom Law Group, told me at press-time in mid-May. “Remember the Temporary FAB is just that — temporary,” Saxon said, referring to Labor’s temporary enforcement policy under Field Assistance Bulletin (FAB) 2018-2, “where the DOL said temporarily it would not enforce ERISA prohibited transaction rules” for those acting as a fiduciary.
“Assuming the SEC is issuing Reg BI fairly soon, DOL doesn’t want to lag too far behind if DOL wants to capture IRA rollover recommendations,” Saxon added. “And they do. But I don’t think DOL will touch the 3(21) Reg. They don’t think they have to.”
The 3(21) Reg defines who is a fiduciary by reason of providing investment advice, Saxon explained, and “includes the so-called five-part test that was revised” under the now-vacated fiduciary rule.
Fiduciary Exchange Acosta announced Labor’s fiduciary plans during an exchange with Rep. Marcia Fudge, D-Ohio, during an oversight hearing held by the House Education and Labor Committee. Here’s Acosta’s exchange with Fudge:
“For far too long, certain, not all, retirement advisors have put their interest above their clients. Workers across this country are demanding a higher standard of care,” Fudge said. “They deserve peace of mind when planning for their retirement. The Department of Labor owes it to the workers of America to fully implement current rules and regulations put in place to ensure that they receive unbiased and fair advice. What is your plan to protect these workers?”
Acosta replied: “Congresswoman, first let me say, you are correct. Like all industries, the investment industry has some bad actors and individuals need to be protected. As you’re aware, the fiduciary rule was struck down by an appeals court. It was held to exceed the statutory authority — ” Fudge interrupted: “I just want to know what you’re going to do, sir.”
Said Acosta: “I’m getting to that … so the department is working with the SEC. The SEC was asked by Congress to look at modernizing the protections in these —”
Fudge interrupted again: “Sir, I’m asking what are you going to do? What is your Department of Labor going to do?”
Acosta replied: “The Department of Labor is working with the SEC; the SEC was asked by Congress to come up with appropriate responses to protect these individuals; we are communicating with them [the SEC] and based on our collaborative work, we will be issuing new rules in this area.”
Fudge then asked: “When will that be?”
Acosta Replied: “The SEC is in the process of producing those rules. We’re working with an independent agency.”
ERISA attorney Fred Reish, partner at Drinker Biddle & Reath’s Los Angeles office, told me in mid-May that while Acosta’s comments “were vague and provided little meaningful direction,” it seems inevitable that the Labor Department “will propose a prohibited transaction exemption that replaces its current Temporary Nonenforcement Policy for certain prohibited transactions resulting from non-discretionary investment advice to plans and IRAs.”
That policy, Reish explained, “says that the DOL and the IRS will not enforce the rules against variable compensation resulting from fiduciary advice, so long as the advice satisfies the best interest standard of care, results in no more than reasonable compensation, and does not include misleading statements.”
Labor, he continued, “will use the same approach in the proposed exemption, but rely at least partially on the requirements of the SEC’s Regulation Best Interest.”
It’s possible that DOL will propose a regulation to modify the definition of who is a fiduciary, Reish opines, but “I think that it is unlikely that the political leadership at the DOL would promote an expansion of the definition of fiduciary status.”
Barbara Roper, director of investor protection for the Consumer Federation of America, added that while the assumption is that Labor will adopt a prohibited transaction exemption for firms that are in compliance with Reg BI, “unless the SEC dramatically strengthens Reg BI’s obligations with regard to conflicts of interest, it’s hard to see how the Secretary of Labor could reach a finding that it sufficiently protects investors from the harmful impact of conflicts of interest.”
The SEC, Roper asserted, “hasn’t done anything even remotely approaching a credible economic analysis to justify its chosen approach.”
The SEC’s Clayton told reporters on the sidelines of the Practising Law Institute’s annual SEC Speaks conference in Washington in early April, however, that he’s “very confident” that the economic analysis that will accompany a final advice standards package will be “robust.”
More on the Fiduciary Front The Office of the Comptroller of the Currency said in early May that it’s mulling updating its fiduciary regulations to be consistent with “recent developments under state laws,” as well as a new set of potential provisions on non-fiduciary custody rules for national banks.
The OCC is seeking comment on whether to update the regulatory definition of “fiduciary capacity” under OCC regs 12 CFR 9 and 150 to be more consistent with recent developments under state laws.
The OCC plan states that “numerous states have modified their trust laws in recent years to define and set expectations for various trust-related roles, including roles that do not possess the investment discretion traditionally granted to trustees. Because some of these state laws frequently describe these roles by using terms other than those specified in the OCC definition of ‘fiduciary capacity’ … these state fiduciary roles may not explicitly be included in the OCC’s definition. As a result, this expanding list of fiduciary roles under state law may create uncertainty for banks about the activities governed by OCC fiduciary rules.”
OCC also requested comment on adding new provisions to OCC regulations to establish “certain basic requirements for non-fiduciary custody activities of national banks, federal savings associations, and federal branches and agencies (collectively, banks), which are not currently addressed by specific OCC rules.”
Meanwhile, the National Association of Insurance and Financial Advisors for New York State is awaiting a decision in its case challenging the New York Department of Financial Services’ Regulation 187, which requires insurance agents, brokers, and insurers “to establish standards and procedures” so that any transaction of such products are in the “best interest of the consumer.”
In its lawsuit, NAIFA-NY argues that promulgating “unprecedented fiduciary obligations across all participants industry wide, DFS exceeded any statutory grant of rulemaking authority.”
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.