The U.S. Department of Labor sent a finished fiduciary rule for investment advisors to the White House for clearance on Monday.
The DOL’s Employee Benefits Security Division sent the finished rule to the Office of Management and Budget for approval to publish the final rule or if the White House wants changes.
“While we don’t know what the guidance does, the suspicion is that it includes an exemption for conflicted advice, if certain conditions are satisfied,” said Fred Reish, a partner in the law firm of Faegre Drinker who closely follows the fiduciary issue. “That would replace the DOL’s current temporary enforcement policy. The exemption likely has, as its conditions, compliance with requirements similar to those in the SEC’s Regulation Best Interest. That relief is much needed.”
Reish added that he expects the modified regulation to expand a fiduciary advice requirement to more professionals. “If nothing else, it probably extends the SEC’s best interest standards to advisors who are not governed by the SEC [including insurance agents]. That is also much needed,” Reish said.
DOL spokeswoman Rhonda Burke did not respond to a request for a copy of the rule. Federal agencies are prohibited by regulation from disclosing the content of rules before OMB approval.
The original DOL fiduciary rule, which required all retail investment advisors to put their clients’ best interests before their own, was struck down in court last year. It raised the legal standard of all advisors working with Erisa plans and rollovers, including registered reps and brokers who currently do not have a fiduciary responsibility to customers, to a fiduciary level.
Because DOL regulations prevent professionals from charging commissions when working with retirement plan customers, the agency required commission-based advisors to disclose their compensation in what was called a “Best Interest Contract Exemption.” The court ruled the agency overstepped it’s authority by imposing the fiduciary standard on reps and brokers and overturned the rule.
Current DOL Secretary Eugene Scalia, who in his past life as a high-profile securities attorney spearheaded the lawsuit to overturn the DOL fiduciary standard for his former client, the U.S. Chamber of Commerce, is expected to produce a much more industry-friendly rule.
“I’m sure everyone is curious about the scope of the DOL’s proposal,” said Duane Thompson, a senior policy analyst with Fi360, a provider of fiduciary-based education and technology. “Will it include changes to the old five-part definition for an Erisa fiduciary, which is now the standard after the Fifth Circuit [Court] overturned the Obama-era rule? Will it include more than one prohibited transaction exemption, as expected, for conflicted investment advice?” Thompson asked.
Thompson also wondered if the DOL’s final rule could be impacted if it relies in part on Regulation Best Interest, which is also plagued by a legal challenge. A number of states and the XY Planning Network are suing the SEC to overturn Reg BI and force the agency to create a level fiduciary playing field for both registered investment advisors and registered reps, who currently are not held to a fiduciary standard. The lawsuits were combined and are being considered in the U.S. Circuit Court of Appeals for the Second Circuit.
“I would say that the DOL is cutting it a little close on timing,” Thompson said. “By that I am referring to the need to put something out for public comment by August in order to avoid having the Congressional Review Act (CRA), a law that allows Congress to easily overturn agency rules it doesn’t like, come into play if Democrats take over Congress and the White House in November. If you recall, the GOP-controlled Congress tried to overturn the Obama fiduciary rule by the DOL using the CRA but was unsuccessful when President Obama vetoed the resolution.”