On June 21, 2018, the U.S. 5th Circuit Court of Appeals vacated the Department of Labor (DOL) fiduciary rule. Originally, the rule was scheduled to be phased in from April 10, 2017 to Jan. 1, 2018. But President Trump took office and it was delayed to June 9, 2017 with certain exemptions extending through Jan. 1, 2018. Complete implementation of the rule was pushed to July 1, 2019.
And then on March 15, 2018, the Fifth Circuit Court of appeals ruled in a 2-1 decision to vacate the rule. This led the DOL to announce that it would not be enforcing the fiduciary rule. Finally, the 5th Circuit Court of Appeals confirmed its decision on June 21st.
This development was met with delight from advisors who work on commission. The rule would have elevated those working with retirement plans or providing retirement planning to the level of “fiduciary,” binding them to a higher legal and ethical standard.
SEC Regulation Best Interest Rule
While many advisors are gladdened to see the vacation of the fiduciary rule, another regulation looms on the horizon: The SEC Regulation Best Interest rule.
On April 18, 2018, the SEC first proposed the “best interest” standard for broker-dealers and their associated persons when recommending securities products and investment strategies to their customers. Under this proposed rule, broker-dealers and their associated persons are required to put the best interest of their clients before their own financial interest.
Under this rule, broker-dealers and associated persons must meet three obligations. Firstly, they are required to disclose in writing the material facts relating to their relationship with the customer. Secondly, they must practice “reasonable diligence, care, skill, and prudence” when making recommendations to their customers. Lastly, they are required to write and enforce policies designed to “identify, and disclose, or eliminate, all material conflicts of interest” associated with their recommendations to customers.
What does this mean?
This means that later in 2019, the SEC plans to enforce a rule that elevates the standards for financial advisors. The current rule, the suitability standard, only requires that the recommendations advisors make be “suitable” for their clients. This doesn’t necessitate that advisors put their clients’ best interests before their own or avoid conflicts of interests.
However, the Best Interest rule does not create a fiduciary duty for commission-based advisors, like the DOL fiduciary rule.
Criticism of the Best Interest rule
According to Bloomberg, 11 former SEC officials signed a letter criticizing the rule as “weak and incomplete.” They cited the economic analysis of the proposal as inadequately considering the “retail client-advisor” relationship.
Also, there are rumors that the U.S. House Financial Services Committee Chairwoman Maxine Waters, D-Calif., is planning a congressional hearing in March to question SEC Chairman Jay Clayton about the proposal.
Neil Simon, Vice President of Government Relations at the Investment Advisor Association, had mixed comments about the Best Interest proposal at the TD Ameritrade National LINC conference. While he referred to it as “pretty broker friendly,” he also said it was ambiguous and questionable in its scope, especially concerning dual registrants.
At any rate, the SEC is now debating the rule and considering any changes. A final action is expected by September 2019. Whatever your feelings on the Best Interest rule may be, it is likely that–if you’re commission-based–you’ll have to adjust the way you recommend products and strategies to your clients.
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https://www.investopedia.com/updates/dol-fiduciary-rule/
https://www.lexology.com/library/detail.aspx?g=29fe5627-4b4b-4b87-b90c-5a7cb1c4bb3f
https://www.sec.gov/rules/proposed/2018/34-83062.pdf
