DOL seeks to define ‘fiduciary’; SEC works on ESG disclosures

The Department of Labor plans to propose a rule by the end of the year that would target conflicts of interest for financial advisers working with company retirement plans and individual retirement accounts, reopening a measure that has a long and controversial history across several presidential administrations.

The agency says it will propose a rule on “the definition of the term fiduciary” by December, according to the regulatory agenda it released last Friday.
On the same day, the Securities and Exchange Commission unveiled its regulatory agenda. The schedule of dozens of upcoming proposals includes a couple governing corporate climate and human capital management, and other environmental, social and governance disclosures.
The SEC also is proposing to revisit regulations promulgated last year when the agency was led by former Chairman Jay Clayton, such as one that expanded the definition of an accredited investor who can buy unregistered securities. The look-back items being pursued by new SEC Chairman Gary Gensler drew criticism Monday from the agency’s Republican commissioners, Hester Peirce and Elad Roisman.
The DOL’s proposed rule on the definition of a fiduciary would mark a return to a Trump-era fiduciary rule that the Biden administration allowed to become effective in February.
In April, the Biden DOL released guidance on the rule, which would allow fiduciaries to receive compensation for advice that would otherwise be prohibited, such as third-party payments, as long as they act in a retirement savers’ best interests.

Now the Biden DOL could modify a five-part test to determine fiduciary status based on “developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest,” the agenda item states.
It’s unclear whether the DOL will overhaul the Trump fiduciary rule or tweak it.

“Unfortunately, this is 2016 all over again,” said Brad Campbell, an assistant secretary of labor and head of the Employee Benefits Security Administration for President George W. Bush. “My prediction is they’re going to fundamentally redraft the regulation and do away with the five-part test.”
The Obama-era fiduciary rule nixed the five-part test and replaced it with a legally binding best-interest contract exemption, which was at the heart of an industry lawsuit that led to the Obama rule being vacated by a federal court.
The Trump fiduciary rule restored the five-part test and included an interpretation that made it more likely that a rollover recommendation would be governed by a fiduciary standard of care.
The Biden DOL likely wants to make more advisers to retirement accounts fiduciaries, said Joshua Lichtenstein, a partner at Ropes & Gray.

“I do think they want to broaden the definition,” Lichtenstein said. “Within the universe of service providers, I think the DOL wants more certainty about which relationships are fiduciary and which are not.”
The DOL effort to strengthen investment advice rules for retirement accounts began in 2010. The Obama, Trump and now Biden administrations all have weighed in.
Although the policy priorities have changed each time, a basic advice regulatory structure has emerged, said George Michael Gerstein, a counsel at Stradley Ronon Stevens & Young.
“The changes will be more at the edges,” Gerstein said. “To the extent there are changes, it will be tweaks to compliance rather than overhauling the paradigm.”
This time around, the DOL should be cautious in how it approaches another fiduciary rule rewrite given the successful legal action against the Obama rule, Campbell said.
“Hopefully, DOL learned some lessons in terms of legal challenges and the negative real-world effects on retirement savers,” said Campbell, a partner at Faegre Drinker Biddle & Reath.
DOL likely will try to ensure that any changes it makes stand up in court.
“I would expect it to be very carefully constructed,” Lichtenstein said.
Financial firms are longing for a conclusion to the DOL fiduciary rule process, Gerstein said. “At some point, the industry needs to have some stability on the regulatory front in this area,”
The SEC took the lead on investment advice regulation when the Obama DOL fiduciary rule died in court. It promulgated Regulation Best Interest, the broker investment advice standard, under Clayton.
A return to Reg BI is not on the SEC regulatory agenda. Gensler has said the agency will use examinations, enforcement and guidance to ensure Reg BI works.
But the SEC is reexamining several other Clayton rules, including those on expanding the definition of an accredited investor and further opening private securities markets to ordinary investors. Those and other regulations being reviewed were finalized last year.
“Not only are the Commission’s most recent amendments to each of these rules less than a year old; they have only been effective for a range of three to seven months,” Peirce and Roisman said in a joint statement Monday. “As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time. We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”
An agency’s regulatory agenda is an aspirational document and not binding. If the agency doesn’t meet the stated deadline, it can delay introduction of a rule.