In the waning days of the Trump administration, the Department of Labor has finalized its controversial replacement for the Obama-era fiduciary rule, one that seems doomed to be replaced, in turn, by the incoming Biden administration.
The department’s rulemaking, which sets down new regulations governing retirement investment advice to align with the SEC’s Regulation Best Interest, provides advisors with more flexible exemptions from fiduciary duties in certain circumstances and clarifies when rollover advice could be considered fiduciary advice.
In the eyes of critics, including consumer advocates, the Labor Department has given advisors and brokers more ways to avoid being held to a fiduciary duty.
This “is a serious erosion of the high fiduciary standard established under ERISA,” says Barbara Roper, director of investor protection for the Consumer Federation of America.
In a statement, Secretary of Labor Eugene Scalia emphasized that the finalized rule will not only give retirees more investment choices but will also bring the rules into better regulatory alignment with the SEC.
“In tandem with action taken last year by the Securities and Exchange Commission, this exemption gives Americans a greater opportunity to invest in the American economy with the assistance of professionals acting in their best interest,” Scalia said.
Eleventh hour rulemaking
The finalization of the revamped fiduciary rule is the latest move by the Trump administration to remake the standards governing conduct by advisors and brokers. Regulation Best Interest took effect earlier this year, and was expressly not a fiduciary standard as Reg BI relies more on disclosure than mitigation of conflicts of interest.
The Labor Department’s rulemaking, however, may not last long given that the Biden administration takes office in just a few weeks and will likely revisit the Trump administration’s last-minute efforts.
“In a number of different ways, it can be derailed by the new administration,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
Rostad adds that there has been a general weakening of advice standards across the board, something he hopes is reversed in the coming years.
The Labor Department’s short comment period is one reason to get up to speed, fast.
Replacing the fiduciary rule has long been an industry goal. Before assuming his current role, Secretary of Labor Scalia, was a private attorney who led the lawsuit that vacated the Obama-era fiduciary rule. That lawsuit was filed by a slew of business groups including the U.S. Chamber of Commerce, SIFMA and FSI.
SIFMA said it welcomed the new Labor Department rules and the nimbleness they provide advisors and brokers.
“The exemption is a step forward as it will encourage a variety of investment advice approaches and it will provide retirement investors with the services they seek. SIFMA supports permitting financial professionals to provide investment advice in a flexible fashion,” SIFMA CEO Kenneth Bentsen said in a statement.
AARP, which was a supporter of the Obama-era fiduciary rule, criticized the new rules for being too permissive of conflicts of interest.
“This rule is both harmful and contrary to the letter and spirit of the Employee Retirement Income Security Act,” Nancy LeaMond, chief advocacy and engagement officer, said in a statement.
The department’s rulemaking becomes effective 60 days after publication in the Federal Register.
