Financial industry, regulators likely to clash over rules slated for second half

The Labor Department's advice rule is likely to lead to controversy over whether a recommendation to roll funds from a 401(k) to an IRA constitutes advice.

A long-awaited investment advice rule proposed by the Department of Labor is slated for release this summer, while the Securities and Exchange Commission has pushed off some rule deadlines but hasn’t quelled criticism of its agenda.

Financial advisors will finally get to see the DOL’s advice proposal in August, according to the updated agency regulatory agenda released in June. The rulemaking likely will redefine the term fiduciary to include more advisors who work with retirement accounts.

It will be another attempt by the agency to strengthen the rules around retirement savings advice to curb advisors’ potential conflicts of interest. An Obama administration rule was struck down by a Texas federal appeals court in a 2018 ruling on a lawsuit brought by financial industry opponents. The Trump administration issued its own version of the rule.

The Biden administration may not meet the August deadline.

“It’s an aggressive timeline,” said Michael Kreps, a partner at Groom Law Group. “I wouldn’t put too much stock in that being a likely date for release. It’s more an indication [the DOL] is still interested in this and they’re not that far away.”

When the proposal comes out, look for controversy over whether a recommendation to roll over funds from a company retirement plan to an individual retirement account constitutes fiduciary advice.

“We’re in for another long and high-profile fight between the department and the regulated community, which will likely wind up in court back in Texas,” Kreps said.

Chair Gary Gensler is maintaining his aggressive approach to rulemaking, with 55 proposals in various stages. But deadlines for final rules have been pushed back from April to October for several major rules, including those on climate change and ESG.

“October is the new April,” said Christine Ayako Schleppegrell, a partner at Morgan Lewis and a former official in the SEC’s division of investment management.

The agenda “is going to be spread out over time,” she said. “I do think the chair is very interested in getting his agenda done. What we’re going to see is very busy ’23 and ’24 in terms of adoptions.”

The Investment Adviser Association is concerned that new rules affecting advisors — including outsourcing, cybersecurity and custody — could overlap, conflict, and be expensive and difficult to implement.

“The commission’s not stepping back and looking at all the pieces of the puzzle and figuring out how they fit together,” said IAA general counsel Gail Bernstein.

The SEC could respond to the pushback.

“That message is resonating,” Schleppegrell said. “The final rules could take a turn based on that feedback and those discussions.”