The Department of Labor is going to craft a new set of fiduciary rules, but early indications show that the soon-to-be resuscitated initiative may be less contentious for the broker-dealer industry.
The DOL is “working with the SEC” and based on that “collaborative work,” the department “will be issuing new rules” in place of the previous DOL fiduciary rule, according to DOL Secretary Alexander Acosta.
Acosta revealed the DOL’s plan at a hearing Wednesday of the House of Representatives House Education and Labor Committee that was called to examine the policies and priorities of the department.
During a brief exchange with representative Marcia Fudge (D-Ohio, 11th District), who brought up the subject, Acosta noted that the previous fiduciary rule was “struck down” by the U.S. Court of Appeals for the Fifth Circuit because “it was held to exceed the statutory authority.” That over-reaching of authority were arguments raised by Sifma and other broker-dealer and financial professional industry groups as well as the White House against the previous DOL rule.
In response to follow-up queries from FA-IQ about the new fiduciary rules, a DOL spokesperson said: “The department’s goal is to align our rules with the SEC’s final rule and to the greatest extent possible to build off and harmonize with the work that they have done.”
The spokesperson was referring to the SEC’s Regulation Best Interest package, which Acosta referenced at the hearing when he said the SEC was asked by Congress to come up with appropriate responses to protect individuals who are being harmed by bad actors in the industry.
Fudge said at the hearing that “for far too long … certain retirement advisors have put their own financial interest above their clients.”
These clients – who are “workers across this country” – are demanding a higher standard of care. “They deserve peace of mind when planning for their retirement,” Fudge said.
“The Department of Labor owes it to the workers of America to fully implement current rules and regulations put in place to ensure that they receive unbiased and fair advice,” she added.
Acosta acknowledged that “like all industries, the investment industry has some bad actors and individuals need to be protected.”
When pressed by Fudge for a timeline on the completion of a new DOL fiduciary rule, Acosta said the timeline would depend on the SEC’s own progress.
The SEC is currently finalizing its proposed Reg BI package, which establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form aimed at clearly stating to clients if they are dealing with a broker-dealer or an investment advisor.
“The SEC is in the process of producing those rules,” Acosta said, referring to the pending Reg BI package. “We’re working with an independent agency.”
Broker-dealer industry lobby group Sifma is a staunch supporter of the SEC’s pending Reg BI.
At a hearing last month before the U.S. House of Representatives Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, Sifma contended the following advantages of the proposed Reg BI:
- The regulation “significantly strengthens and materially exceeds” the existing Finra suitability standard.
- It holds broker-dealers to an “even higher standard” than the one which applies today to investment advisers, because disclosure of conflicts alone does not satisfy the standard.
- It “preserves access and choice for investors while providing meaningful protections” in areas that the vacated DOL fiduciary rule sought to address.
- It “appropriately follows a principles-based, facts and circumstances approach.”
But critics of the pending Reg BI complain that it’s a watered-down regulation because if fails to explicitly assign fiduciary obligations to brokers.
The vacated DOL rule would have required retirement account advisors to act as fiduciaries or put their clients’ best interests before their own. The vacated DOL rule would have also required investment advisors to inform their investors of any potential conflict of interest and get them to sign a Best Interest Contract Exemption document if they receive variable compensation for the advice they give. That rule would have affected brokers more because they are currently subject merely to suitability standards, whereas RIAs have been subject to fiduciary standards for decades.