Some speculating DOL will write new exemption based on SEC rule
March 1, 2018 by Nick Thornton
As the Securities and Exchange Commission continues to field comments on a uniform fiduciary standard, some stakeholders are speculating that the Labor Department could draft a new exemption to its fiduciary rule based on a best interest standard produced by the SEC.
“One potential outcome of DOL’s rule is that if you satisfy SEC requirements, you then satisfy the DOL rule,” said Cliff Kirsch, a securities attorney with Eversheds Sutherland.
Full implementation of Labor’s fiduciary rule has been delayed until July of 2019, as that agency considers revisions to the regulation promulgated under the Obama Administration.
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In effect, the Labor Department could craft a new sellers’ exemption that says an advisor or broker is in compliance with the fiduciary rule, so long as they are in compliance with the standards ultimately produced by the SEC, according to Mr. Kirsch’s analysis.
That approach would go a long way to satisfying industry critics of Labor’s fiduciary rule, who have argued for years that the SEC is the more appropriate agency to establish and enforce regulations for the securities industry.
It would also likely be met with fierce criticism from consumer advocates that back full implementation of Labor’s fiduciary rule, who fear the SEC will undercut investor protections by drafting a disclosure-based fiduciary standard.
In comment letters to the SEC, some of the industry’s most influential stakeholders have raised the prospect of a new exemption for Labor’s fiduciary rule that is conditioned on meeting a best-interest standard crafted by the SEC.
Fidelity said the best path forward for Labor’s fiduciary rule is a new prohibited transaction exemption aligned with an advisor, broker, or insurance agent’s primary regulator.
Under that idea, only advisors to employer sponsors of retirement plans would be purely beholden to Labor’s fiduciary rule. Providers to the retail market would be beholden to best interest standards produced by the SEC, bank regulators, and insurance regulators.
Comments from BlackRock and Vanguard also raise the prospect of a coordinated exemption between the SEC and Labor Department, based on uniform standards from the SEC.
LPL Financial’s comment letter is perhaps most direct: “The (Labor) Department could adopt an exemption that would condition availability on being subject to, and complying with, the Commission’s standard of conduct.”
Duane Thompson, senior policy analyst at Fi360, a compliance consultancy, says rumors emanating from policy circles have Labor waiting for the SEC to propose its uniform standard before making final revisions to the fiduciary rule.
“Conceivably, the SEC would come out with its standard on conflicts of interest, and then the DOL would revise its rule and say if you are in compliance with the SEC, then you are deemed to be in compliance with (Labor’s) Best Interest Contract Exemption,” said Thompson.
Both Mr. Kirsch and Mr. Thompson said a new rule from the SEC and revised rule from Labor cannot be identical.
But conditioning an exemption on the prohibited transactions in Labor’s rule on compliance with the SEC would be one way to coordinate regulation of advisors and brokers across all investment accounts, a stated goal of SEC Commissioner Jay Clayton and Labor Secretary Alexander Acosta.
Mr. Thompson cautioned that speculation on what either agency will do is just that—speculation. “Ever since Sec. Acosta held out an invitation for input from the SEC, rumors have abounded everywhere. At this point, this is all conjecture. No one knows what will come out—I’m not even sure Mr. Acosta and Mr. Clayton know at this point.”
Impartial conduct standards not going anywhere
The fiduciary rule’s impartial conduct standards, implemented in June of 2017, are often described as embodying the spirit of the full fiduciary rule.
Under those standards, all brokers and advisors to qualified retirement plans are fiduciaries. Product recommendations must be made in the best interest of investors. Intermediaries can only receive reasonable compensation and are prohibited from making misleading statements.
Many of the comment letters to the SEC embrace the impartial conduct standards.
In its letter, broker-dealer Raymond James writes: “We believe the path is straightforward. The Impartial Conduct Standards at the heart of the (Fiduciary) Rule provide the cornerstone of an SEC best interest standard for brokerage and advisory relationships, and can also be used by the National Association of Insurance Commissioners in model language that could be adopted by state regulators governing products covered by state insurance laws.”
When Sec. Acosta announced his agency did not have power to delay implementation of the impartial conduct standards last year, some corners of industry pushed back, even after claiming to be for a higher fiduciary standard of care for years.
“The Labor Department is between a rock and a hard place with the impartial conduct standards,” said Mr. Thompson. “A lot of opponents to the rule would like to see them go away.”
Mr. Kirsch, who wrote a comment letter to the SEC on behalf of the Committee of Annuity Insurers, said that is not likely to happen.
“It’s fair to say the impartial conduct standards will be around, in one form or another,” said Kirsch. “It’s not reasonable to suspect DOL would do away with them in wholesale way.”
Mr. Thompson says the standards make for a sound base for a uniform rule that applies across brokers and advisor channels.
“They are a good starting place because they provide basic, core principals of fiduciary conduct, and bring broker-dealers under that standard,” said Thompson. “The standards could bridge the gap between DOL and the SEC—they create a commonality of a fiduciary duty that impose twin duties of prudence and loyalty that now apply to brokers under Labor’s rule.”
Were Labor or the SEC to dilute the impartial conduct standards, regulators would likely face lawsuits from consumer groups for failing to enforce a law that is already in effect, said Thompson.
Moreover, neutering the standards would galvanize more states to establish their own fiduciary standards. Nevada, New York, New Jersey, Connecticut and Maryland are in the process of legislating or regulating new fiduciary standards.
Industry sees that prospect as a genuine threat. Several comment letters to the SEC are urging regulators to craft a uniform fiduciary standard with clear language preempting state regulations.
“That would be a real mess—to have a patchwork of state requirements,” said Thompson. “If regulators go too far at the federal level to cut consumer protections, states will take their own course of action.”
The states that have moved on new fiduciary requirements, and the others that have signaled the intention to, have “quite a bit of leverage” over how the SEC and Labor Department harmonize a higher standard of care for all of industry, says Thompson.
“Regulators can ignore the states at their own peril,” he added.
