In a shocker, on March 15 the 5th Circuit Court of Appeals decided to vacate the DOL fiduciary rule. If left to stand, the pre-June 2017 definition of fiduciary would once again be in effect, as would the earlier prohibited transaction exemption landscape, killing the controversial Best Interest Contract Exemption (BICE) in the process.
Whether the embattled DOL fiduciary rule has been dealt a mortal blow by the 5th Circuit hinges largely on whether the DOL (or some other party) decides to appeal the court's decision. Judiciary protocols provide a short window of opportunity for an appeal to be filed. Absent appeal, the ruling is slated to take effect on May 7.
In a scenario where the rule is killed, it looks like we are headed for a "back to the future" scenario with respect to who is, and will continue to be, considered fiduciaries. "Willing" fiduciaries, such as RIAs and retirement advisers serving under ERISA, would see their world largely return to as it was before the rule took effect.
For those who became fiduciaries because of the DOL Rule, the future is less certain and closely tied to SEC rulemaking expected as early as mid-year.
The ERISA standard is still the highest standard, but the death of the fiduciary rule would once again allow more brokerage and insurance company-based advice providers to navigate around fiduciary accountability. It requires fiduciaries to act in the "sole interest" of plan participants and beneficiaries, allowing conflicts only when the fiduciary can comply with specific prohibited transaction exemptions. BICE departed from the "sole interest" standard and eliminating it will remove this accommodation for business models with compensation conflicts.
The SEC seems disinclined to change the status quo for Registered Investment Advisers, so the standard that is in place under the Investment Advisers Act of 1940 will most likely continue to apply as it does today. The Advisers Act requires RIAs to adhere to a fiduciary standard, but it is a "best interest" fiduciary standard that allows more conflicts to exist as long as they are disclosed and managed in clients' best interests.
While the conversation has been focused on SEC "fiduciary" rulemaking, what is more likely is for the SEC to propose a new non-fiduciary "best interest" interpretation of fair dealing by broker-dealers under the Securities Exchange Act of 1934. This would be the easiest way to preserve the status quo for RIAs and ERISA fiduciaries and minimize further conflicts with them.
A heightened "suitability plus" standard established through SEC rulemaking would require brokers to more fully and carefully disclose and manage conflicts of interest, perhaps under some set of obligations derived from the impartial conduct standard approach laid-out in the DOL fiduciary rule. This approach would allow advice to be rendered without requiring the broker to register under the Advisers Act so long as it meets the "incidental advice" exemption of that act. Presumably, the SEC will clarify the boundaries of the exemption in their rulemaking.
Importantly, the SEC seems determined to include some form of title protection in its upcoming rulemaking. Brokers would not be permitted to call themselves "advisers" (or other titles suggesting that advice is more than an incidental part of their business) unless they are registered under the Advisers Act. This would certainly help to reduce customer confusion about differences between professional advisers and financial product salespersons. Significantly, the Fifth Circuit suggested regulating titles in a footnote to their decision to address regulators' concerns about investor confusion.
The back to the future scenario for RIAs and ERISA fiduciaries, coupled with a non-fiduciary best interest standard for brokers would result in three levels of client protection; you can think of them as "high-test" under ERISA, "regular" under the Advisers Act, and "economy" under the Securities Exchange Act. Economy seems apropos given fiduciary opponents' contention that fiduciary accountability is too costly for investors.
Arguably, this three-tier regulatory structure is "harmonized" in that all are oriented towards investor protection but at different levels. For investor advocates, this would certainly be a better outcome than "homogenization" of the various standards to an overall lower level of investor protection.
Blaine F. Aikin is executive chairman of fi360 Inc.