The Washington INsider

As curtains close on DOL fiduciary rule, SEC advice rule takes center stage

Anti-fiduciary forces may find it easier to challenge the SEC's proposed rule now that the Department of Labor's regulation is all but dead

May 3, 2018 @ 2:26 pm

By Mark Schoeff Jr.

It's appropriate that the likely demise of the Labor Department's fiduciary rule occurred during the same week that Tony Award nominations were announced.

A day after the productions and performers competing for Broadway's top honors were revealed, the 5th Circuit Court of Appeals denied efforts by AARP and three states to defend the DOL regulation in court.

Just like that, the DOL is likely to relinquish its long-running lead-actor status in investment-advice reform and be relegated to a supporting role — or maybe even the chorus.

When the Department of Justice, acting on behalf of the DOL, failed to appeal the March 15 split decision by a 5th Circuit panel to vacate the rule, it was up to the outside intervenors to save the rule.

It looks as if they've failed to do so. Even more unlikely is a DOJ appeal to the Supreme Court, which must be filed by June 13.

Now attention turns to the Securities and Exchange Commission, which introduced its own investment-advice proposal on April 18.

The financial industry plaintiffs in the 5th Circuit couldn't be happier that the SEC is now firmly in the lead on investment-advice policy. They argued that the DOL didn't have authority to promulgate the regulation, which requires brokers to act in the best interests of their clients in retirement accounts, and that the SEC was the appropriate regulator to tackle the issue.

One of the strong motivations for the SEC to introduce its own proposal was to join DOL on the stage, a position it had occupied since the agency first introduced a fiduciary proposal in 2010. But if the DOL is no longer above the title on investment-advice reform, what happens to the show?

As was evident in the April 18 SEC vote on its proposal, there is not yet much enthusiasm for the agency's approach.

"Without the hammer of the DOL rule, you start to wonder how difficult it will be for the SEC to get to closure on a rule that everyone can live with," said Andrew Oringer, a partner at the law firm Dechert.

Indeed, the pressure exerted by the DOL's presence is likely to dissipate as the DOL fades into the background.

The 5th Circuit ruling gave the agency a perfect reason to abandon an Obama administration regulation that the Trump administration opposes. The Trump DOL had already postponed full implementation of the rule while it conducts a re-assessment of the measure mandated by Mr. Trump that could lead to major changes.

"I don't think it's clear whether the Department of Labor is going to maintain its review of the rule now that the rule has been vacated," said George Michael Gerstein, a partner at Stradley Ronon Stevens & Young. "We'll be in a holding pattern over the next several months on where we go from here."

A former DOL official said that the agency already is cycling down.

"It is my understanding that the DOL has hit the brakes on the re-evaluation," said Erin Sweeney, a member at Miller & Chevalier and a DOL senior benefits law specialist during the George W. Bush administration. "It's not at the top of anyone's priority list at the moment."

Although it is on its deathbed, the fact that the DOL fiduciary rule was once alive and vibrant has influenced where we are today on the advice-standards journey.

In an analysis released on Thursday, the Bates Group, a financial services consulting firm, said that the SEC proposal is a "compromise between the regulatory status quo and the now-deceased fiduciary duty rule."

But the firm noted that the "disparate reaction by the [SEC] commissioners, market participants and political leadership" ensure a challenging SEC rulemaking process that may not end until 2020.

The question is whether the show can go on that long if DOL is no longer part of the production.

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