Déjà Vu in Financial Regulation: Unraveling the DOL’s Retirement Security Rule

It’s Groundhog Day all over again. Except this time, the experience isn’t nearly as entertaining as the 1993 film starring Bill Murray.  

The Department of Labor’s effort to impose a fiduciary duty under ERISA on the industry goes back more than a decade. The latest iteration was unveiled in late October.

Now, the DOL is calling it something else: The Retirement Security Rule. Moreover, it also claims that it is meaningfully different from past fiduciary proposals.  

However, by any name – and despite what the Department says – the rule largely mirrors the one a federal court in Texas threw out in 2016 after FSI and other like-minded organizations brought a legal challenge.

To be clear, our concerns with the rule are not rooted in a blanket opposition to advisors having to operate under a standard care. On the contrary, we have long supported Reg BI and the fiduciary duties laid out under the Investment Advisers Act of 1940. 

What we take issue with is the mounting number of duplicative policies and procedures that financial advisors have to navigate to demonstrate that they are acting in a client’s best interest. 

With this in mind, FSI, in conjunction with our partners at Eversheds Sutherland, recently held a webinar to provide members with the latest intel on this issue. Some of the most important high-level takeaways are below.   

How did we get here? 

The DOL’s 2016 rule, which treated anyone who made a paid recommendation to a retirement investor as a fiduciary, was struck down by a court in 2018. DOL claims that its new proposal is more narrowly tailored than the 2016 rule, maintaining that it should be able to establish a new standard of care applicable to transactions not covered by existing laws.  

Is the proposal more narrowly tailored? 

We strongly believe that it is not. The most glaring example is that the proposal treats almost everyone who works in financial services as a fiduciary, thanks to arbitrary measures like title. The rule is problematic for various reasons, but based on this alone, it would lead to similar outcomes as the 2016 rule.

How can DOL claim that it’s more narrowly tailored? 

By relying on a series of technicalities. Under the 2016 rule, anyone who has provided a recommendation would have been considered a fiduciary. Think of a family member or a friend making a recommendation over Thanksgiving dinner. So long as they received any form of economic recompense, they were a fiduciary. 

But the Department has never expressed concern about those interactions in the past, nor should they. By limiting the proposed definition to investment professionals, it can now claim that the rule is more narrowly tailored, which is disingenuous.

Can’t I just rely on PTE 2020-02 when working with clients? 

The Department clearly wants to become the standard of conduct regulator, with PTE 2020-02 as the compliance blueprint. In keeping with that, the carve-outs in the proposed definition are narrower than in 2016, and the Department is imposing additional requirements for the industry in PTE 2020-02. Not only does that mean that firms and advisors will have to contend with an extra layer of regulations – which, in many instances, overlap with others already on the books – but they would have to revise and expand existing disclosures, policies, procedures, and other documentation. The upshot is spending more time, money and resources complying with an unnecessary rule limiting access to advice.   

Given all this, how can the DOL ignore the court ruling in 2018? 

The DOL says it is mindful of the decision. However, its expansive view of what constitutes a fiduciary (i.e., any professional offering a suggestion to a retirement investor is a fiduciary) is at odds with what the court decided in 2018. At the time, the court, in ruling that the Department improperly exercised its authority, said the boundaries of the law in this area remained defined by the intent of Congress when it enacted the statute nearly 50 years ago.

Will FSI challenge the rule? 

Ultimately, the Board will make that decision. They will be thoughtful and measured. Rest assured, we have the processes in place – including having access to expert outside counsel with expertise in this area – to analyze the rule and engage in appropriate advocacy for our membership and the clients they serve.