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DOL Fiduciary Rule Redux

The Sequel No One Asked For, Or Needs

Last month, the Department of Labor introduced a new rule ostensibly aimed at protecting the interests of American retirement savers but in reality, it could limit access to advice and education while also limiting investor choice in advisors. Feel like you’ve seen this movie before? You have, and it doesn’t end well.

Washington, DC - ***Official Department of Labor Photograph*** Photo Credit: Department of Labor - Shawn T Moore

A Brief Review of History

In 2010, the DOL proposed a rule under the Employee Retirement Income Security Act of 1974 (ERISA) that dramatically expanded the 35-year-old regulatory definition of fiduciary.

The proposed rule was poorly thought through and would have left millions of retirement accounts without the ability to make even the most routine investments. After strong opposition due to the harm it would have caused, the DOL withdrew the rule.

In 2015, the DOL re-proposed the rules, and despite theoretically studying all aspects of the issue for five years, the new version proved no more workable, popular than its predecessor, or – as it turned out – legal.

A few data points on the negative impacts of the 2015 rule: a Deloitte study commissioned by SIFMA found the rule would have led to less choice for investors. Specifically, 53% of financial institutions surveyed reported being forced to limit or eliminate access to retirement savers, impacting 10.2 million accounts. Nearly 95% of firms surveyed reduced access to at least some of the products typically offered to retirement savers.

The rules were challenged in court in 2016 by a group of trade organizations including SIFMA. About two years later, the Fifth Circuit Court of Appeals vacated the rule and related changes.

Turning to today, the DOL re-branded their latest effort as the “Retirement Security Rule” and claimed it was narrow, tailored, and designed to close gaps not otherwise subject to regulation and supervision.

In fact, that is not the case: the 2023 version is just as expansive and unworkable in practice as the previous versions, if not more so. Not only does this proposal go well beyond the stated purpose of “leveling the playing field,” between securities and insurance regulation this proposal will negatively impact investor access to many advisors they have access to today, and will likely negatively impact product offerings and costs to investors.

It is not only too broad but also entirely unnecessary

Since DOL first proposed a change to the definition of fiduciary under ERISA, the regulatory landscape has evolved to the benefit of investors in the following significant ways:

  • The SEC adopted Regulation Best Interest (Reg BI), which requires that all investment recommendations must be in the retail consumer’s “best interest;” specifically, broker-dealers cannot put their interests ahead of the customer’s interests. This new standard was adopted in 2019 and went into effect in 2020. This standard ensures that broker-dealers either eliminate or disclose and mitigate, material conflicts of interest.
  • The states who by federal law regulate insurance products have developed and implemented standards for state insurance commissioners including a fiduciary standard and these standards have been adopted by 43 states and the District of Columbia as of 2023.
  • In 2020, the DOL issued a prohibited transaction exemption, PTE 2020-02. This exemption took a commonsense approach to trading exemptions for advisors who agree in writing that they are acting as fiduciaries.  It allows investment advice fiduciaries to receive compensation when giving advice in a customer’s best interest.

These changes negate the need for a new, overly expansive, and conflicting rulemaking but, the DOL appears determined to jam the rule through – granting an abbreviated and rushed comment period of only 39 workdays for interested parties to review and comment. A comment period this brief for a proposed rule on the definition of a fiduciary is unprecedented, particularly when compared to the 2010 Fiduciary Rule and 2016 Fiduciary Rule and Related Exemptions proposals, which granted significantly more time for public comment. In this case, SIFMA joined 17 other trades in asking the DOL to again provide at least a similar comment period– especially for a proposal that is nearly 500 pages long – but the DOL summarily denied  the request, noting that commentators have had at least a decade to weigh in on the issue, which of course flies in the face of the assertion that this proposal is no redux of the 2010 and 2015 proposals

The DOL should proceed with caution and thoroughly review the incoming comments and testimony from all stakeholders. The proposal lacks sufficient cost-benefit analysis that the DOL has an obligation to present.  This proposal could fundamentally alter how individual retirement savers access investment advice and potentially create multiple competing regulatory standards, thereby introducing unnecessary, new investor confusion.

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Lisa Bleier is Managing Director and Associate General Counsel, Head – Wealth Management, Retirement and State Government Relations at SIFMA.

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