The ink on the Trump administration's new Department of Labor rule was barely dry yesterday when DOL Secretary Eugene Scalia and SEC Chairman Jay Clayton went on the defense, publishing a joint op-ed in the Wall Street Journal touting “the rule that will help ensure American workers and retirees have access to high-quality investment advice at a fair price.”

It may be a short-lived victory lap.

The rule, “Improving Investment Advice for Workers & Retirees Exemption,” won final approval from the DOL but still won't go into effect for another couple of months. It allows advisors in retirement plans to be exempt from prohibitions on certain transactions, including a multitude of compensation, provided advisors adhere to a series of “impartial conduct standards.”

The new rule is likely to be delayed and even rescinded by the incoming Biden administration before it becomes effective, Fred Reish, a noted retirement plan authority and partner at the Faegre Drinker Biddle & Reath LLP, told Financial Advisor Magazine.

Barbara Roper, director of investor protection at the Consumer Federation of America, said she assumes “the Biden administration will delay implementation of the rule and that DOL and SEC will use that time to develop a plan for strengthening the investor protections offered by Reg. BI and the DOL rule alike.”

The standards include a best-interest standard, a reasonable compensation' standard and a requirement that advisors make no materially misleading statements, but allows them to accept a plethora of forms of compensation that have previously been prohibited.

As a result, advisors will be allowed to accept commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs, as long as they can meet best interest and impartial conduct standards.

The final rule extends the exemption to allow financial institutions to engage in principal transactions with retirement plans and individual retirement accounts (IRA) using purchases or sales of  investments from their own accounts.
The final rule also prohibits private rights of action and places enforcement authority solely with DOL regulators.

According to the DOL, the prohibited transaction exemption “will be effective and available to financial institutions and investment professionals beginning 60 days after the date of publication of the final exemption in the Federal Register.”

In June, the DOL announced that it would propose the new fiduciary standard based on a temporary policy put in place after the Fifth Circuit Court of Appeals vacated the DOL’s previous rule in March 2018.

According to FSI President and CEO Dale Brown, the DOL rule, along with the Securities and Exchange Commission’s Regulation Best Interest, will establish an industry-wide best interest standard.
“With Regulation Best Interest (Reg BI) now in effect, is imperative that other regulations align with the standard set forth by the SEC,” Brown said. “We are thoroughly reviewing the final exemption. However, based on the approach of the initial proposal, we are hopeful that the new [prohibited transaction exemptions] will harmonize with Reg BI’s requirements. Harmonization of these rules will ensure access to retirement advice for Main Street Americans and provide financial professionals with the regulatory clarity and consistency they need to confidently serve their clients."

Consumer representatives are less pleased. “The new rule by the DOL no longer requires investment advisors to give advice solely in the best interest of clients,” AARP EVP Nancy LeaMond said.
“AARP is deeply disappointed that at a time when Americans need sound financial advice and protection of their retirement assets more than ever, the Department of Labor has put forward a rule that will loosen restrictions on advisors, promote conflicts-of-interest, and fail to adhere to the long held fiduciary principle that advisors must act in the sole interests of plan participants. This rule is both harmful and contrary to the letter and spirit of the Employee Retirement Income Security Act (ERISA),” LeaMond added.