Industry and investor protection advocates alike are meeting with the White House Office of Management and Budget about the Labor Department’s latest iteration of its fiduciary rule, one of the final steps before it can be finalized and released for public comments.
Since the rule was delivered to the OMB in early September, organizations from the Securities Industry Financial Markets Association and Financial Services Institute to the Institute for the Fiduciary Standard and the Consumer Federation of America, have held meetings with OMB and DOL officials concerning the new rule, according to OMB records.
At the heart of the disputes between these advocacy groups is whether the Securities and Exchange Commission’s Regulation Best Interest and National Association of Insurance Commissioners’ best interest rule for annuity recommendations negate the need for a revised DOL fiduciary rule.
Both of those rules fall far short of what’s needed, CFA Director of Investor Protection Micah Hauptman told WealthManagement.com (CFA met with the OMB and DOL on Oct. 6, accompanied by representatives from the Public Investors Advocate Bar Association and FiduciaryPath).
“The deficiency with Reg BI is its applicability. It just doesn’t extend to the types of products that need to be covered to comprehensively protect retirement savers,” Hauptman said. “The problem with the NAIC model rule is it’s weak.”
But Marc Cadin, CEO of Finseca, a trade organization for financial security professionals (with an OMB/DOL meeting set for Oct. 20), said in a WealthManagement.com interview that he was frustrated by critics of the SEC and NAIC rules, saying they were “roughly equivalent to scientists in their lab coats working with beakers in controlled environments” without considering reality.
“What they’re looking for is a regulatory result that, while well-intended, actually hurts consumers because they can’t get the products and advice they need,” Cadin said.
The proposed rule would “amend the regulatory definition of the term fiduciary … to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries” within ERISA, according to its OMB summary. It’ll also consider whether investment advisors are compensated in ways leading to “harmful conflicts of interest.”
Past iterations of the rules have particularly honed in on ERISA’s “five-part test” for determining whether advice falls under fiduciary protections, with a particular focus on what kind of advice is considered part of an “ongoing” client/advisor relationship.
Labor Departments under numerous presidential administrations have repeatedly attempted to codify fiduciary rules, including a 2000s-era rule the DOL reversed and an Obama-era attempt vacated in court by the Fifth Circuit Court of Appeals in 2018.
The Trump administration released its own version of the rule in 2020, which went into effect in 2021 (though enforcement was delayed until 2022). This rule hit a roadblock in Florida federal court, when judges overturned DOL guidance related to the rule. The Labor Department dropped its appeal of this ruling in May, presumably as it worked on its own fiduciary iteration.
Cadin said he intended to offer up research by Ernst & Young illustrating the benefits of financial planning that included advice on annuities and life insurance, and worried a new rule out of the DOL would inhibit the ability for retirement savers to get that help.
“Versions 1 and 2 were not the right policies, which is why the DOL pulled back version 1 and version 2 got vacated,” he said. “If version 3.0 isn’t the right policy, then it shouldn’t go forward.”
Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, said the 2018 Fifth Circuit decision, the Florida ruling and ongoing legislation in Texas all have gone (or are leaning) against the DOL’s fiduciary rules.
“Continuing to push for regulations only to have them overturned in court is not only a bad look, but it’s also costly, harmful and creates unnecessary confusion in the marketplace,” Berkowitz told WealthManagement.com.
It was a perspective shared by Bradford Campbell, a partner with the law firm Faegre Drinker (and former Assistant Secretary for Employee Benefits Security at the DOL under President George W. Bush). He questioned if the department could “properly thread the needle” with a new rule that avoids the legal pitfalls from previous decisions.
To Campbell, the central hurdle was that the DOL was attempting to widen its jurisdiction by imposing its standard of care into the IRA marketplace, contrary to ERISA laws.
“The fact that they want a different policy outcome than the law allows is their problem,” he argued.
Many industry advocates cite the dual prongs of Reg BI and the NAIC model rule as reasons for the DOL not to move forward on rulemaking. Berkowitz at the IRI argued the SEC rule and NAIC model, both passed after the DOL’s Obama-era fiduciary attempt, make the need for new regulation “far lower and potentially even non-existent.”
But Hauptman didn’t buy it. To him, the combined rules didn’t suffice in protecting retirement savers. Reg BI only applied to securities recommendations, so insurance products and others not regulated as securities wouldn’t fall under the rule’s protections. But Reg BI also didn’t apply to advice for plan sponsors, Hauptman argued.
Therefore, if a small business wanted to set up a 401(k) for employees and worked with a service provider to choose investment options for that plan, that advice wouldn’t be covered. That left businesses in danger of getting conflicted advice from providers that could adversely harm employees choosing from limited options.
“The advice the employer gets about what to include in the menu can directly impact the quality and cost of investments available to the employees,” he said. We know small differences in cost can add up to a lot of money over time. It can be tens of thousands over a career.”
If the Reg BI rule falls short on relevancy, the NAIC model didn’t even meet its self-stated best interest standard, instead effectively restating the suitability rule, according to Hauptman. Even further, the rule defines conflicts of interest in such a way that it excludes cash and non-cash compensation, “the primary drivers” of conflicts, Hauptman argued.
“It would exclude commissions, trails, fees and trips, and all the perks they get to encourage and reward them for recommending whatever makes the firm the money,” he said. “It totally guts the rule.”
It’s uncertain when the new DOL rule will be released for public comment, though Jacqueline Hummel, the director of thought leadership and regulatory compliance at the ACA Group, had heard the end of October or mid-November as possible times.
“But a government shutdown will also shut the proposal down,” she said. “In any event, given the fast and furious pace of the SEC’s adoption of regulations, I think the industry would prefer some breathing room before another significant rule is passed."