The Department of Labor announced Thursday it had delayed its planned new fiduciary rule by three months—to December—ostensibly to wait for the Securities and Exchange Commission to finalize its own “Best Interest” package of regulations.
The agency’s last fiduciary rule, a 1,000-page effort that was finalized in April 2016, was vacated in the Fifth Circuit Court of Appeals in early 2018. Its new plan can be found in its spring agenda.
The agency’s now-defunct regulation, which for the first time extended a fiduciary standard to brokers who work with retirement plans, was overturned on appeal by the brokerage and insurance industries.
“The department is considering regulatory options in light of the Fifth Circuit opinion,” the DOL said in its agenda notice.
The moribund rule required brokers to file for exemptions for prohibited transactions and disclose conflicts of interest in order to be able to charge plans and plan participants commissions and fees.
The potential for continued legal challenges from the securities and insurance industries is inevitable. The more the DOL and SEC rules dovetail, the more likely they are both to be waylaid by litigation, policy experts said.
“The only thing that could possibly go ‘wrong,’ at least from a regulator’s perspective, is if the SEC’s final rule is challenged in court,” said Duane Thompson, senior policy analyst with Fi360, a fiduciary education, training and technology firm. “That doesn’t necessarily mean the DOL would hold off on its own rule, but it would be déjà vu all over again. By that, I mean if a court vacated or agreed to an injunction against the SEC’s rule, and the DOL’s rule was based on compliance with the SEC’s rule, at the very least it would put both rulemaking efforts on hold.”
After the DOL’s fiduciary rule was struck down, the agency issued a temporary non-enforcement policy that requires advisors to:
- Use a best-interest standard of care with customers;
- Make no materially misleading statements;
- Charge only reasonable compensation; and
- Apply this to non-discretionary advice only.
In the meantime, however, the DOL also launched what it calls its National Enforcement Project to “investigate the receipt of improper or undisclosed compensation and support the department’s [initiatives] … that plan fiduciaries and participants receive comprehensive disclosure about service provider compensation and conflicts of interest.”
A number of advisors have been ensnared in DOL enforcement as a result of the project, said Drinker Biddle Partner Fred Reish. The DOL has brought enforcement for fiduciary violations against advisors including:
- An RIA that charged an advisory fee to its own 401(k) plan;
- An affiliate of an RIA that received 12b-1 fees and other revenue based on investment recommendations that the RIA made to a 401(k) plan;
- An RIA and a third-party administrator (TPA) that were owned by a common parent, but went afoul of fiduciary regs when the TPA administered the RIA’s plan for a fee;
- An affiliate of an IRA that was a sub-advisor to Collective Investment Funds (CIFs). The RIA, acting as a fiduciary advisor to plans, recommended the CIFs to retirement plans.