SEC’s Clayton Responds to Department of Labor’s New Fiduciary Rule

The day before Regulation Best Interest went into effect, another agency reentered the fray.

Jay Clayton (Andrew Harrer/Bloomberg)

Jay Clayton

(Andrew Harrer/Bloomberg)

For a decade, federal institutions, industry groups, and financial services companies had been in a sort of cold war over the standard of service mandated of financial advisors. For years, observers implored the Security and Exchange Commission to update its rules, and deliver definitive answers on when advisors must act as fiduciaries to their clients. But as the SEC’s Regulation Best Interest finally went into effect today, the conflict feels hot as ever.

On Monday, June 29, the eve of the SEC beginning to enforce Regulation Best Interest (often shortened to “Reg BI”), the department that brought the fiduciary debate into headlines reentered the fray.

“The U.S. Department of Labor today announced that it is proposing a new exemption for investment advice fiduciaries. The Department’s actions today will benefit American workers and retirees by delivering more choices for their financial future with clear standards to be upheld by investment advice providers,” the DOL said in a statement.

The new proposal would allow advisors to offer more choices to investors for retirement using what the DOL calls Impartial Conduct Standards or “a best interest standard; a reasonable compensation standard; and a requirement to make no materially misleading statements.” For example, under the department’s new rules, advisors would be permitted to engage in principal transactions in employee benefit plans and individual retirement accounts and annuities (IRAs). Without that exemption, they would otherwise violate the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.

“Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers. The exemption would add to the tools individuals need to make the right decisions for their financial future,” U.S. Secretary of Labor Eugene Scalia said in the statement.

A 60-day comment period is now underway for those proposed changes and others related to retirement accounts.

The Fifth Circuit Court of Appeals vacated the DOL’s first fiduciary rule in 2018, arguing the department lacked the authority to create the rule package it proposed two years earlier. But the department says its latest proposal is based on the policies temporarily adopted after it lost in court and that it will “align with standards of other regulators, including the SEC. Together, the actions of the SEC and the Department of Labor will strengthen retirement security for Americans.”

The DOL has been in contact with the SEC since the regulator said last summer it would consider and propose its own rule package.

But while Reg BI enhanced compliance and disclosure, best practices to avoid conflicts of interest, and the exercise of reasonable care when making recommendations, it has faced scrutiny. (And attorneys, including the former head of enforcement at the Financial Industry Regulatory Authority, are keeping an eye out to see how the SEC enforces Reg BI.)

And the DOL’s latest proposal is a clear indication that the department and the SEC still do not agree on all details of law governing advisors. The rules that ultimately became Reg BI are still being contested within the U.S. government, not to mention between industry groups and others.

On Monday, SEC Chairman Jay Clayton issued a statement in response to the DOL’s proposal that flew in the face of his agency’s rules going into effect today.

“I commend the Department of Labor for their efforts to clarify and align the standards of conduct that investment professionals must follow in providing advice to Main Street investors. The proposed exemption announced today reflects in part the Commission’s constructive and ongoing engagement with the Department. I look forward to continuing our work with the Department so that collectively we can enhance investor choice and increase investor protections,” Clayton said.

Although, the head of the regulator might not be around much longer to engage with the DOL on the fiduciary duty of advisors. The New York Times recently reported that Clayton was interested in becoming the top prosecutor for the Southern District of New York.

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