DoL greenlights fiduciary rule replacement, but leaves door open to changes

The Department of Labor confirmed that a replacement for the Obama-era fiduciary rule will go into effect Feb. 16 — but the agency left the door open for new regulatory changes.

The rule change permits investment fiduciaries to receive compensation as a result of advice to roll over assets from a retirement plan to an IRA, and to engage in principal transactions that would otherwise be prohibited. The exemption applies to SEC and state-registered investment advisers, broker-dealers, banks, and insurance companies.

The move is the latest in the ongoing tug-of-war over regulatory standards governing advisors and brokers.

Although the Biden administration has indicated it would focus on stronger investor protections, the Labor Department said it was permitting this holdover change from the Trump administration to go forward as planned in recognition of the challenges financial firms face.

“We recognize that investment advice providers have been preparing for the exemption, and this step will allow them to implement important system changes. That said, we will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment advice fiduciary, and related exemptions to build on this approach,” Deputy Assistant Secretary of Labor for the Employee Benefits Security Administration Ali Khawar said in a statement.

Acting SEC Chair Herren Lee said in a statement the regulator looks forward to working with their counterparts at the Labor Department to “improve existing regulations and ensure that investors get advice that serves their best interest, whether in retirement or securities accounts.”

Consumer advocate Barbara Roper, director of investor protection at the Consumer Federation of America, called on the regulators to craft stronger protections for investors, saying the Trump-era regulatory framework was based “on the SEC’s vague and undefined Regulation Best Interest.”

“But Reg BI’s chief weakness – that key terms like “best interest” and mitigation of conflicts are undefined – could now be its chief strength, if new leaders at the agency interpret and enforce these requirements to the benefit of investors, as we expect they will,” Roper wrote on Twitter.

The back-and-forth over investment advice standards has been going on for years. The Obama administration’s Labor Department implemented a fiduciary rule that applied to advisors and brokers giving investment advice with regard to retirement accounts. The effort was intended to update rules dating to the 1974 Employee Retirement Income Security Act (ERISA).

Wall Street trade groups sued the department, and the rule was eventually vacated by a federal appeals court. The lead plaintiff’s attorney, Eugene Scalia, later became Secretary of Labor under President Trump.

Under Scalia’s watch the department issued its replacement for the Obama-era rule last year, aiming to align Labor Department regulations governing retirement investment advice with the SEC’s Regulation Best Interest. The rules are intended to provide advisors with more flexible exemptions from fiduciary duties in certain circumstances and to clarify when rollover advice could be considered fiduciary advice.

To investor advocates, it was a weakening of standards that gave brokers too much leeway to evade being held to a fiduciary duty.

Industry trade groups welcomed the Labor Department’s decision to allow the new rules to take effect.

FSI General Counsel David Bellaire said in a statement that it “provides the regulatory clarity and consistency financial services firms and financial advisors need to confidently serve their clients.”