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DOL, SEC Set Targets for Fiduciary, Advice Rulemaking

The federal government’s updated unified regulatory agenda has shed light on the status of the Securities and Exchange Commission’s and Department of Labor’s efforts on investment advice and the now-vacated fiduciary rule.

The SEC’s updated regulatory agenda confirms that the agency has set a target date of September 2019 to finalize its proposed package of investment advice rulemaking.

Meanwhile, like the SEC’s updated agenda, the DOL regulatory agenda shows that it also plans to issue a final rule in September 2019.

The DOL’s agenda explains that the agency is considering its regulatory options in light of the 5th Circuit U.S. Court of Appeals’ ruling vacating “in toto” (U.S. Chamber of Commerce v. Department of Labor) the regulation revising the definition of fiduciary that had been finalized in April 2016.

SEC and DOL Coordination?

Other than the target release date, the agenda provides no additional details as to what the DOL may be considering. But while speculative, it could signal that the DOL and SEC are working together.

“I think that it is clear that the DOL and SEC are coordinating. However, I believe that the SEC is taking the lead and the DOL will issue its guidance based on the SEC’s final rules for broker-dealers and investment advisers,” explained ERISA attorney Fred Reish, partner with Drinker Biddle & Reath LLP.

Reish suspects that the primary guidance may be a class exemption to replace some of the relief that would have been provided by the Best Interest Contract Exemption (BICE) and that is currently provided by the DOL/IRS non-enforcement policy for non-discretionary fiduciary investment advice.

“I doubt that there will be a major DOL rewriting of the fiduciary rule, but there could be some minor changes, for example, on rollovers,” Reish further notes, while adding that his comments on the fiduciary rule are just speculative.

It also should be noted that September 2019 is a target release date for the regulatory packages, and, as is often the case in Washington, delays do happen. Nevertheless, this does provide a snapshot of the anticipated timeline and a hint of things to come.

The SEC’s Investment Advice Package

On April 18, the SEC voted to release for comments the proposed Regulation Best Interest, Form CRS relationship summary and interpretive guidance on the standard of conduct. During the comment period, which ended Aug. 7, 2018, the agency received several thousand letters offering support, criticism and recommendations for improving the proposals, including suggestions by the American Retirement Association.

The proposed rules seek to establish a standard of conduct for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. The agency also proposed a new Form CRS relationship summary to disclose to retail investors key facts about the relationship, including material conflicts of interest, as well as amendments to Form ADV. The regulatory package also proposed restrictions on the use of certain names or titles, as well as proposed revisions to the interpretation of the standard of conduct for investment advisers under the Advisers Act of 1940.

The DOL’s Fiduciary Rule

The U.S. Court of Appeals for the 5th Circuit issued its mandate vacating the Labor Department’s fiduciary rule June 21, after the court’s March 15 ruling. While the 5th Circuit’s decision had the effect of eliminating the requirements of the fiduciary rule, it also did away with the Best Interest Contract (BIC) Exemption, which provided a means for advisors to provide advice as an ERISA fiduciary and still receive commissions.

The DOL on May 7 issued Field Assistance Bulletin 2018-02 announcing that it was extending until further notice its temporary enforcement policy relating to its rule defining who is a fiduciary and the associated prohibited transaction exemptions. As noted above, the fiduciary regulation’s demise notwithstanding, the FAB is important because, even though the BICE has been set aside along with the rest of the rule, what the FAB essentially does is to provide for non-enforcement where the impartial conduct standards set forth in the BICE – which was in the fiduciary rule – are satisfied.

Since the start of the summer, there essentially had been no indication or pronouncements beyond the non-enforcement policy in the FAB as to what action, if any, the DOL would take – until now.