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Best Interest Rules In Fiduciary Responsibility Introduced By Security And Exchanges Commission

Posted by Jeffrey Forbes on Aug 9, 2018 9:00:00 AM

Best Interest Rules In Fiduciary Responsibility Introduced By Security And Exchanges Commission  

Many regulations put into place during the past few years have faced the potential for roll-backs under the current administration. This holds especially true for some controversial rules issued by the Department of Labor. These roll-backs, though, have introduced their levels of uncertainty into the marketplace, placing companies at considerable risk of unwittingly acting against their own interests.

Cooperation In Updating Regulations

A significant example of this involves the Department of Labor’s Fiduciary Rule. The Department of Labor has the authority to regulate employer-provided retirement plans under the Employee Retirement Income Security Act, more commonly known as ERISA. At the same time, the Security and Exchanges Commission has the authority to regulate investment advice given outside the scope of employer-provided retirement plans. The SEC and the DOL, starting in 2010, had initially tried to cooperate in updating their regulations concerning investment advice and conflicts of interest so that rules would closely mirror each other. These efforts failed after a considerable period of time, and eventually the Department of Labor issued their own rule on the issue.

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ERISA Changes The Definition For Fiduciary

The DOL’s Fiduciary Rule significantly expanded the definition of who qualified as a fiduciary under ERISA and imposed a best interests standard on any fiduciary giving investment advice. The regulations would have provided a best interests contract exemption allowing companies to avoid being held to a best interests standard if they met a large number of documentation requirements and avoided certain types of transactions.

The DOL Rule Was Denied In March 2018

The U.S. Court of Appeals for the Fifth Circuit struck down the Department of Labor’s Fiduciary Rule on March 15, 2018. The Department of Labor has not chosen to appeal, but the Fifth Circuit has also not issued its mandate in the case, meaning the rule remains in effect for now . . . Except for the fact that the compliance deadline rule had already been delayed until July 1, 2019. The Department of Labor has not indicated how it intends to respond except for a statement that has no plans at current to enforce it.

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Disclosure Of Conflicts Of Interests

Stepping into this mess, after eight years, the SEC has now issued their own “best interests” rule for public comment. Under notice and comment rulemaking, the public has ninety days to comment on the SEC proposal before the SEC can consider those comments, revise their rule, and issue a final rule. The proposed rule, for now, seems to strike a middle ground between current standards and the DOL Fiduciary rule. It requires the disclosure of conflicts of interests and requires that brokers put the interests of customers ahead of their own interests. At the same time, the standards in the rule seem purposely vague and therefore may make it difficult to ensure they remain compliant.

Enforcement Issues

Even without the potential for various revisions or withdraw after a public comment period, the future of the SEC rule remains in doubt. Any SEC final rule will almost certainly face the same level of judicial scrutiny as the Fiduciary Rule did, with perhaps very little to distinguish the cases at the end of the day. The SEC also lacks the ability to implement some of the enforcement procedures available to the DOL.

State Regulations Are Catching Up

On top of all this, and partly in reaction to the vacuum created at the federal regulatory level, many states have also moved to change the regulation of investment advice and broker-customer relationships. However, those states that have acted have implemented different measures with different standards focused on various investment vehicles, only adding to the overall chaos.

Advice For Businesses

For now, everyone needs to do everything in their power to comply with current versions of applicable laws and regulations while keeping an ear to the ground for future changes.  Many companies already spent millions of dollars preparing to comply with the Fiduciary Rule and may continue to hold themselves to a higher standard (while avoiding prohibited transactions) as a form of marketing.  Employers need to ensure their retirement plans and all fiduciaries remain in compliance with ERISA and the applicable regulations or face the potential for expensive litigation. 

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Topics: For Your Business, Employee Benefits, Retail, HR Insights, ERISA, 401K, Fiduciary Liability, Laws for Employers