DOL Eyes Fiduciary Rule Re-Proposal in December
The Department of Labor expects to propose a new fiduciary rule governing broker conduct in selling retirement accounts in December, according to a revised spring regulatory agenda posted on the Office of Management and Budget website.The new posting did not provide details, but Labor Secretary Alexander Acosta has signaled that the proposed rulemaking will be harmonized with the final customer-care rules package that the Securities and Exchange Commission is expected to issue within the next few weeks governing advice to retail investors.
That would soothe industry concerns about disparities of standards that evolved with the Obama-era DOL fiduciary rule that was vacated last summer by the Fifth Circuit Court of Appeals, but is unlikely to convince investor-advocacy groups.
“Whatever they come out with is virtually certain to be a negative for investors,” said Knut Rostad, president of the Institute for the Fiduciary Standard, which advocates for raising broker-dealers’ suitability standard of care to the higher customer-first fiduciary standard for investment advisors. “Their desire to mimic the SEC is terrible.”
The earlier DOL rule created conniptions within the retail brokerage industry because of concerns that it would have been risky to offer commission-based retirement accounts that could pass muster under a high standard of customer care. More tellingly, the industry feared the rule’s enabling investors to participate in class-action lawsuits over fiduciary breaches.
“My bet is that they don’t try to recreate the private right of action,” said Fred Reish, an employee benefits law partner at Drinker Biddle & Reath in Los Angeles who writes frequent blog posts about the twists and turns of the DOL’s fiduciary rule proposals.
A spokesman at the DOL did not return a request for comment.
Acosta told the House Committee on Education and Labor on May 1 that his department, which after Trump’s election had delayed the effectiveness of much of the Obama-era rule, was working collaboratively with the SEC.
Broker-dealers continue to bite their nails over how the final versions of the rules will affect their sales policies and litigation bills.
Several firms, including Merrill Lynch, made sweeping changes that included prohibition of commission-based retirement accounts to meet the earlier DOL fiduciary rule, only to roll them back when the court vacated the rule.
Debate also continues as to how far-reaching the SEC’s rulemaking package will be. The proposal, which includes a best-interest standard but avoids defining it, would require firms to “mitigate or eliminate material conflicts of interest” between brokers and their customers. It does not specify the means for doing that or the circumstances under which elimination rather than mitigation would be required.
“With requirements to put the customers’ interests first, every individual firm is going to have to think how they are going to have to do that, and how they mitigate or eliminate conflict,” LPL Chief Legal and Risk Officer Michelle Oroschakoff said at Finra’s annual compliance conference last week.
Firms also are concerned about the patchwork regulatory scheme arising as states enact their own standard-of-care rules. New Jersey last month proposed a rule requiring all financial service professionals to abide by a fiduciary duty, and Nevada has passed a law ordering its state regulator to promulgate standards for a broad swathe of the financial advisory community.
“The Partnership is dedicating significant resources to interpret and address these laws and rules,” Jones Financial Cos.—parent of Edward D. Jones, the largest broker-dealer by number of advisors—wrote in a regulatory filing earlier this month.
Alluding to both the SEC and state proposals, Jones wrote in its first-quarter earnings filing: “The Partnership cannot reliably predict the ultimate form or impact of such rules and laws, but their enactment and implementation may have an adverse effect on the Partnership’s financial condition, results of operations and liquidity.”