As his first major policy initiative, Securities and Exchange Commission Chairman Jay Clayton announced on June 1 that he welcomed an invitation by Labor Secretary Alexander Acosta to, among other things, "engage constructively as the Commission moves forward with its examination of the standards of conduct applicable to investment advisers and broker-dealers." That apparent interest on the part of the SEC to move forward with a fiduciary standard for broker-dealers in the retail space came somewhat as a surprise, though the SEC and DOL have a common interest in having consistency across the regulatory regimes for retirement and retail advice — an interest shared by all advice-providers in the marketplace.
Despite having taken partial effect on June 9, a cloud of uncertainty surrounds the DOL fiduciary rule. The Trump administration's DOL has signaled that the final effective date of Jan. 1, 2018 is likely to be pushed back and changes to the rule are expected. Some of the harshest critics of the rule continue to press for outright rescission or a major overhaul.
(More: The case for a single fiduciary standard based on the Investment Advisers Act of 1940)
What happens next for the rule will be a product of practical realities. The DOL currently has three options available as it prepares for a new round of public comments on phase two of the rule. The agency could (1) do nothing, thereby letting the full rule take effect next year, (2) seek to rescind the rule entirely, or (3) propose changes. Keeping the status quo is highly unlikely, given the Trump administration's efforts to reduce overall regulation in Washington. Rescission is equally unlikely because consumer and labor groups stand ready to defend the rule in court, with a very good chance of winning, given the flawless record fiduciary advocates and the Obama Labor Department have established in fighting off legal challenges to date. Change is the only viable option.
With the new fiduciary definition in place, along with the requirement for fiduciary retirement advisers to adhere to impartial conduct standards, these aspects of the rule are virtually a lock to last. It is in the realm of exceptions to the rule — prohibited transaction exemptions (PTEs) — where the most significant changes will occur, as the DOL has indicated. The best-interest contract exemption (BICE) is by far the most consequential PTE in the DOL rule, and this is where the SEC's actions could have a big impact.
The fact that in introducing BICE the DOL lowered ERISA's sole interest standard (which requires conflicts to be avoided) to a best interest standard (allowing conflicts to exist so long as they are managed in the client's interest), means that there is a basis for common ground to be found.
(More: When advisers actively seek to use BICE)
For example, the SEC could establish a disclosure requirement coupled with some form of impartial conduct standard obligations to allow brokers to sell proprietary products as fiduciaries. This could be structured to conform to the section 206 antifraud provisions of the Advisers Act but also be aligned to the conceptual framework of BICE for ERISA accounts.
It is worth noting, however, that the SEC's authority is generally limited to broker-dealers, investment advisers and securities products. This jurisdictional divide leaves insurance agents out of the mix in any final rulemaking by the SEC. Instead, they would be subject to any final DOL rule and/or state regulations.
Speaking of state regulations, actions at the state level could also have an impact on federal regulatory developments. Nevada just passed a bill that goes into effect on July 1 expanding an existing fiduciary duty for financial planners to broker-dealers and registered investment advisers. The bill's sponsor, Senate Majority Leader Aaron Ford (D), cited the possibility of an indefinite delay to the DOL rule for prompting him to "take steps here in Nevada … to protect our state residents."
(More: DOL fiduciary rule takes effect, but more uncertainty lies ahead)
We have seen state legislatures revolt against Washington for failing to address the lack of pension coverage for millions of private sector workers. A handful of states have already enacted laws setting up mandatory state-run plans. If the DOL and SEC devise a watered-down fiduciary standard for retirement advice, we could see other states move in to plug the fiduciary gap.
Change is certainly in the wind, but it is still blowing strongly in the direction of full fiduciary accountability for all who provide personalized financial advice.
Blaine F. Aikin is executive chairman of fi360 Inc.
