By Carol Buckmann
Who will fill the vacuum left by the demise of the Fiduciary Rule? Industry professionals and practitioners have been asking that question since June, when it was clear that the Fifth Circuit decision invalidating the Fiduciary Rule would not be appealed. The SEC has issued its own proposal, but it does not appear to apply to advice given by brokers to retirement plan fiduciaries. We can’t know the future of the SEC proposal or whether it will be changed. We recently also learned that the Department of Labor may be working on a new fiduciary rule, to be released next year.
States Step Forward. In the interim, some states have stepped forward. Nevada extended its rule subjecting brokers to fiduciary standards and client lawsuits in July, 2017. Massachusetts regulators continue to pursue Scottrade for failing to follow procedures implemented to comply with the Fiduciary Rule, having defeated an attempt to transfer their case to federal court, and we have just learned that the State of New Jersey is poised to issue its own fiduciary standards for brokers. We don’t yet have the text of the New Jersey rule, just a “pre-proposal” from its Securities Commission, but the pre-proposal does not mention any carveout for plans covered by ERISA.
Does ERISA permit states to act to enforce their own fiduciary rules? Many practitioners think that although these states have good intentions in trying to protect the public, the answer to that question is “no.” States appear to be giving inadequate consideration to the principle of ERISA preemption when crafting their fiduciary rules.
Nationwide Standards Are Important. One of the stated goals of ERISA was to provide for uniform administrative and fiduciary rules that applied to plans in every state. This eliminated the need for employers to apply different rules to their operations in different states and the possibility that states might issue rules that were in conflict with the ERISA rules. ERISA also provides a comprehensive scheme for remedying fiduciary breaches, making fiduciaries personally liable for losses caused by their breaches of responsibility and permitting participants to sue under Section 502 in the event of fiduciary breaches.
That is why Section 514 of ERISA preempts the application of state law relating to covered employee benefit plans. There is an exception for laws of general applicability relating to insurance, banking and securities, but these would not appear to apply to targeted state fiduciary laws. In fact, ERISA does not contemplate that states will have any role in the enforcement of fiduciary standards.
The U.S. Supreme Court’s most recent statement on ERISA preemption in Gobeille invalidated a Vermont law that required welfare plans to make reports not required by ERISA because it interfered with ERISA’s goal of nationally uniform recordkeeping and administrative requirements. Language in Gobeille supports the preemption of state fiduciary laws.
What About IRAs? One exception is that state regulation might apply to IRAs, since IRAs that are not part of an employer plan are not subject to ERISA. This argument was raised by opponents of the Fiduciary Rule who saw the regulation of IRAs under the Rule as unauthorized.
Will the Courts Step In? In response to a request for comments, the American Retirement Association has filed a “brief” urging the New Jersey Commissioner of Securities to carve ERISA plans out of its new regulation. However, if states choose to enforce their laws without carveouts, challenges are bound to follow. It will be up to the courts to define the scope of a state’s ability to set its own fiduciary standards. They are likely to stop this well-intentioned incursion into federal employee benefit plan regulation.