As part of a two-day marathon markup of 23 bills, the House Financial Services Committee on October 12 approved legislation to repeal the Department of Labor’s fiduciary rule and create a new standard of conduct for broker-dealers.
H.R. 3857, the Protecting Advice for Small Savers Act of 2017 (or "PASS Act"), was introduced on Sept. 27 by Rep. Ann Wagner (R-MO), who has been an ardent opponent of the regulation and has repeatedly tried to stop it from being implemented.
Encouraging committee members to vote for her bill, Wagner explained that, “Nearly eight years ago, the Dodd-Frank Act provided the SEC with the ability to create a regulatory framework for broker-dealers if they choose, yet after numerous attempts, the SEC failed to act. Unfortunately, what consumers got instead was a misguided rule implemented by the Department of Labor that created a bifurcated standard that is both confusing and harmful.”
New Proposed Best Interest Standard
In addition to retroactively repealing the fiduciary rule and the related prohibited transaction exemptions, the bill would amend the Securities Exchange Act to require a broker-dealer to act in a retail customer’s best interest when providing a recommendation. According to the bill, such recommendations must reflect:
- reasonable diligence; and
- reasonable care, skill and prudence that a broker-dealer would exercise based on the customer’s investment profile.
The bill also specifies that it would not be a violation of the standard of conduct by a broker-dealer or any affiliate for the:
- receipt of compensation, including transaction-based compensation; or
- recommendation to a retail customer of principal transactions (including cross transactions), or the recommendation of affiliated, unaffiliated or proprietary products or services, or a limited range of products or services.
Moreover, there would be no requirement to recommend the least expensive security or investment strategy (however quantified) or to analyze all possible securities, other products or investment strategies before making a recommendation.
Disclosure Requirements
The bill also seeks to provide a new disclosure regime for broker-dealers. In particular, it would require a broker-dealer to disclosure to a customer before purchasing a securities product on behalf of that customer:
- the type and scope of services the broker-dealer provides;
- the standard of conduct that applies to the relationship;
- the types of compensation the broker-dealer receives; and
- any material conflict of interest.
Other Provisions
The PASS Act also would:
- limit the SEC’s rulemaking authority under Section 913 of Dodd-Frank;
- prevent the Treasury and Labor departments from promulgating fiduciary regulations on broker-dealers under ERISA; and
- preempt state laws to avoid a patchwork of standards.
Senior Safe Act
During the marathon markup session, the committee also approved legislation — the Senior Safe Act of 2017 (H.R. 3758) — to provide immunity from suit for certain individuals who disclose potential examples of financial exploitation of senior citizens. The bill provides that:
- a supervisor, compliance officer, or legal advisor for a covered financial institution who has received training regarding the identification and reporting of the suspected exploitation of a senior citizen (at least 65 years old) shall not be liable for disclosing such exploitation to a covered agency if the individual made the disclosure in good faith and with reasonable care; and
- a covered financial institution shall not be liable for such a disclosure by such an individual if the individual was employed by the institution at the time of the disclosure and the institution had provided such training.
What’s Next?
While Wagner’s PASS Act will likely be approved by the House, it faces a less certain path in the Senate, where there are tighter margins between the two parties. Nevertheless, SEC Chairman Jay Clayton has stated that harmonizing a fiduciary rule with the Labor Department is a top priority for him and he has laid out steps the SEC plans to take to do so. It’s also likely that the SEC is following the activities in the House and could incorporate the ideas outlined in the legislation into any forthcoming proposal.
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As we’ve reported, the DOL is also currently conducting a review of the final rule and on August 30 proposed to extend the transition period for three prohibited transaction exemptions (BICE, the 84-24 exemption and the principal transactions exemption) until July 1, 2019.
Meanwhile, there have been several legislative attempts to undo and/or replace the DOL’s fiduciary rule:
- The House of Representatives on June 8 approved broad-based financial overhaul legislation (H.R. 10) that seeks to repeal major provisions of both the Dodd-Frank Act and the DOL fiduciary rule.
- House Education and Workforce Committee Member Phil Roe (R-TN) and Ways and Means Subcommittee on Tax Policy Chairman Peter Roskam (R-IL) introduced legislation (Affordable Retirement Advice for Savers Act, H.R. 2823) to repeal the fiduciary rule and establish a statutory definition of “investment advice.”
- Sen Johnny Isakson (R-GA) introduced the Affordable Retirement Advice Protection Act (S. 1321) that seeks to replace the DOL’s fiduciary rule by implementing new investment advice standards under ERISA.
