Fiduciary rule's third iteration could come with sharp regulatory teeth

A Department of Labor reevaluation of the bloodied-but-still-standing fiduciary rule could well result in its restoration to Obama-era levels of stringency, advocates say.

The Employee Benefits Security Administration plans to issue a Notice of Proposed Rulemaking addressing the definition of fiduciary, according to the Labor Department’s just-released Spring 2021 Regulatory Agenda.

Regulatory rulemaking schedules can be a moving target and do not always lead to tangible results. But Barbara Roper, director of the Consumer Federation of America, is optimistic that a fiduciary rule with teeth will emerge from this process.

“I think they have been as clear as possible that their intent is to do rulemaking in these areas,” Roper says, noting the guidance the Biden Labor Department has already issued regarding conflicts of interest and impartial conduct standards — restoring provisions that the Trump administration previously stripped.

Roper says, however, that she doesn’t see the rule regaining its full 2016 potency. “A couple of provisions are not coming back,” she predicts, naming one “strenuously opposed by the industry” in which private enforcement mechanisms kicked in once money was rolled over into an IRA.

The fiduciary rule was enacted under President Obama, only to be defeated in court. The Trump administration declined to defend the rule and, shortly before President Trump left office, issued a replacement rule intended to align it with the SEC's Regulation Best Interest. The Biden Department of Labor let the replacement rule go into effect in February.

Fiduciary and consumer advocates objected most to that version’s establishment of a prohibited transaction exemption under ERISA permitting advisors to receive various forms of compensation when providing advice that might entail conflicts of interest.

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Ron Rhoades, a long-time fiduciary advocate, and currently a financial advisor at ARGI Investment Services, agrees that the Labor Department means business.

“[It] will dramatically expand the number of advisors that will be fiduciaries under ERISA,” Rhoades says. “Instead of now, where it’s actually fairly easy to not be a fiduciary under the Trump administration rule, it will likely become very difficult to not be a fiduciary.” In the end, he says, there’s likely to be “a strengthening of rule.”

Knut Rostad, president of the Institute for the Fiduciary Standard, adds to the chorus of optimistic voices. “I’m upbeat,” he writes in an email. “The administration’s instincts are right and [U.S. Secretary of Labor Martin] Walsh is a fighter. The issue is avoiding a successful legal challenge. The odds are good a rule with teeth makes it.”

All concur that the next task will be bolstering the SEC’s Regulation Best Interest. In this regard, Roper expresses confidence in the commission’s recently sworn-in chairman, Gary Gensler, and his two commissioners.

“And then we’ll see whether it’s enough to get the industry to clean up its act, '' she says. “If not, we may come back to do more rulemaking.”