In this article we review recent developments with respect to the Department of Labor’s fiduciary rule, including DOL’s RFI, recent testimony by DOL Secretary Acosta, and comments by Securities and Exchange Commission Chairman Clayton regarding the rule.
DOL releases RFI
In February, 2017, President Trump ordered a DOL review of the fiduciary rule. On April 7, 2017, DOL issued a regulation delaying the applicability date of the rule for 60 days, until June 9, 2017. In that regulation, DOL also delayed compliance with certain requirements of the exemptions included in the “regulation package” (including, e.g., the Best Interest Contract (BIC) Exemption) until January 1, 2018.
As part of its review, on June 30, 2017, DOL released its much-anticipated “Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions.” The RFI asks for comments/information on a number
of issues that DOL has indicated it is interested in, including:
Whether DOL should extend the January 1, 2018, date for “full applicability” of the exemptions.
Whether the emerging use of “clean shares” might provide a basis for a more streamlined exemption. (DOL references a 2017 SEC staff interpretive letter describing clean shares as “a class of shares of a mutual fund without any front-end load, deferred sales charge, or other asset-based fee for sales or distributions.”) In this regard, DOL expressed concern that developing, e.g., a new clean shares-based exemption might take longer than the January 1, 2018, exemption full applicability date.
The possibility of streamlining the exemptions to focus on disclosure on “a few key issues” with more information available on request.
Efforts to comply with the rule taken to date.
Whether the rule “appropriately balance[s] the interests of consumers in receiving broad-based investment advice while protecting them from conflicts of interest.” There will, no doubt, be strongly opposing views on this issue.
Whether the additional exemption requirements scheduled to become effective January 1, 2018, (e.g., the BIC contract and disclosure requirements) are necessary. It is an interesting question whether compliance during the period June 9, 2017-January 1, 2018, with the “more relaxed” impartial conduct standards may be regarded as sufficient to change targeted conflicted practices. In this regard, in the RFI, DOL indicated an interest “in the possibility of regulatory changes that could alter or eliminate contractual and warranty requirements.”
Whether “recommendations to make or increase contributions to a plan or IRA [should] be expressly excluded from the definition of investment advice.” A number of groups have been pushing DOL to give some sort of pass to “innocent” advice. The specific issue identified by DOL in the RFI – recommendations to make or increase contributions – probably does not go far enough. What about, e.g., recommendations that a participant not to put his money in 2 different TDF tranches or even not to put it in the TDF and some other fund? Or, on termination of employment, a recommendation that the participant put her distribution in an IRA or a qualified plan, rather than taking it in cash. Indeed, the latter example is arguably the economic equivalent of making a contribution.
Whether possible SEC updated standards of conduct for investment advisers and broker-dealers could justify streamlining the DOL exemptions.
Responses on the question about delaying the January 1, 2018, exemption applicability date are due 15 days from date of publication of the RFI in the Federal Register; other comments are due 30 days from publication.
On June 27, 2017, DOL Secretary Acosta testified before the Senate Appropriations Committee’s Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, in a hearing on DOL’s Fiscal Year 2018 budget request.
One issue that came up (in questioning from Senator Lankford (R-OK)) was whether DOL had requested SEC involvement in the review of the fiduciary rule. Secretary Acosta, in response, stated: “Previously the SEC did not work with the Department of Labor. … I think that the SEC has important expertise and that they need to be part of the conversation, and I asked the Chairman of the SEC if the SEC would be willing to work with us. The Chairman indicated his willingness to do so, and it is my hope that … the SEC will continue to work the Department of Labor on this issue.”
SEC asks for comments on new standards of conduct
On June 1, 2017, SEC Chairman Jay Clayton issued a statement requesting public comment on the “Standards of Conduct for Investment Advisers and Broker-Dealers.” In his statement, Chairman Clayton explicitly referenced DOL Secretary Acosta’s invitation to the SEC to involve itself in its review of the DOL fiduciary rule. Clayton also stated that, in light of the new DOL rule (among other things), “an updated assessment of the current regulatory framework, the current state of the market for retail investment advice, and market trends is important to the Commission’s ability to evaluate the range of potential regulatory actions.”
The SEC invited comments on a number of issues, including two that go directly to DOL’s fiduciary rule:
What has been the experience of retail investors and market participants thus far in connection with the implementation of the Fiduciary Rule? How should these experiences inform the Commission’s analysis? Are there other ways in which the Commission should take into account the Department of Labor’s Fiduciary Rule in any potential actions relating to the standards of conduct for retail investment advice?
As of the applicability date of the Fiduciary Rule, there will be different standards of conduct for accounts subject to the Department of Labor’s rule and those that are not, as well as existing differences between standards of conduct applicable to broker-dealers and those applicable to investment advisers when providing investment advice. What are the benefits and costs of having multiple standards of conduct?
The second issue identified – the current situation in which, e.g., a broker’s recommendations with respect to an investor’s IRA are subject to the DOL fiduciary rule but her recommendations with respect to the investor’s regular brokerage account are not – has been identified as particular problem, and source of confusion, under the new DOL rule.
The possibility of SEC involvement in DOL’s review of the fiduciary rule is intriguing. Many (including many in Congress) pushed for greater SEC involvement in its development but, as Secretary Acosta observed in his testimony, that did not happen.
Whether the SEC will have any effect on the review of the rule remains to be seen.
In his testimony, Secretary Acosta also said that he is committed to identifying subcabinet appointees (including, we assume, a new head of the Employee Benefit Security Administration) by 60 days from his taking office – so we should be hearing something on this issue relatively soon.
As we understand it, oral argument in the appeal (before the Fifth Circuit) of the lower court’s decision (for the DOL) in litigation challenging (among other things) the constitutionality of the fiduciary rule is scheduled to take place at the end of July, 2017.
While most are skeptical that legislation to repeal or modify the fiduciary rule (reported on in our June Current outlook) can pass the Senate on a standalone basis, it is possible that similar legislation could be included in 2017 budget reconciliation legislation.