SEC’s Fiduciary Rule Could Erase Question of Labor Dept. Appeal

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By Kristen Ricaurte Knebel

The Securities and Exchange Commission may have just done the Labor Department a huge favor.

The SEC unveiled its take on a fiduciary rule late April 18, and the proposed rule includes elements that echo the DOL’s embattled fiduciary rule. That could make it easier for the DOL to walk away from its own fiduciary rule and not appeal a recent court decision that vacated it, sources told Bloomberg Law.

“The SEC has critical expertise in this area, and the Department is encouraged that the SEC is undertaking this effort,” a DOL spokesman told Bloomberg Law in an email.

“The movement being shown by the SEC may make the DOL more comfortable with allowing the Fifth Circuit decision to stand and thereby causing the rule to die,” Andrew L. Oringer, an employee benefits attorney at Dechert LLP in New York, told Bloomberg Law in an email.

The SEC’s nearly 1,000pageproposal comes at a time when the fate of the DOL’s fiduciary rule is in question. The U.S. Court of Appeals for the Fifth Circuit in a 2-1 decision March 15 vacated the Obama-era rule that aims to regulate the advice given to retirement savers. The department has a strict deadline to seek review of the Fifth Circuit decision. If it doesn’t meet the April 30 deadline, the Fifth Circuit’s mandate will go into effect May 7 and the fiduciary rule would dissolve. The DOL also has until June 13 to ask the U.S. Supreme Court to hear its appeal of the decision.

The controversy with the DOL’s fiduciary rule is probably the reason the SEC decided to step up to the plate and propose a rule after years of inaction, Oringer said. The SEC had expressed interest in tackling a regulation on advisers and broker-dealers in the past, but nothing had materialized until now.

Protecting Investors

One of the reasons the DOL had for crafting its fiduciary rule was the agency didn’t feel retail investors had adequate protections. The new SEC proposal could alleviate any lingering concerns the DOL may still have on that front, Michael L. Hadley, an employee benefits attorney and partner with Davis & Harman LLP in Washington, told Bloomberg Law.

The SEC proposal includes a new best-interest regulation that would require a broker-dealer to act in the best interest of a retail customer at the time a recommendation is made. Broker-dealers would also be required to “disclose, mitigate, or eliminate” material conflicts of interest.

Having an SEC proposal on the table that includes investor protections could take some pressure off the DOL if the agency was considering an appeal of the Fifth Circuit decision, George Michael Gerstein, counsel with Stradley Ronon in Washington, told Bloomberg Law. Gerstein focuses his practice on fiduciary and prohibited transaction issues under the Employee Retirement Income Security Act.

However, Gerstein doesn’t think it’s likely the DOL will appeal the Fifth Circuit’s ruling and the new SEC rule could provide the DOL with “some cover for not doing so.”

Similar Best-Interest Standards

Some elements of the SEC’s proposal are similar to the DOL fiduciary rule’s best-interest contract exemption, Kevin L. Walsh, a benefits attorney with Groom Law Group in Washington, told Bloomberg Law. Having these elements included in an SEC rule could make the DOL more comfortable not appealing the Fifth Circuit decision, he said.

The DOL best-interest contract exemption allows advisers and financial institutions giving investment recommendations to retail investors to receive compensation that would otherwise not be allowed under ERISA and the tax code. The advisers must recognize their fiduciary status in writing and adhere to fiduciary standards of conduct. For individual retirement accounts and non-ERISA plans, the standards must be put in writing in an enforceable contract.

The SEC may have taken comments on the DOL’s best-interest contract exemption into account when drafting its new proposal, Walsh said. The new proposal “largely tracks” with core elements of the DOL’s best-interest contract exemption, which was aimed at allowing individuals offering services in the retirement space to get additional compensation if they met certain conditions.

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