Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



SEC Proposes Fiduciary Rule "Lite": What It Does and Doesn't Do

SEC Proposes Fiduciary Rule "Lite": What It Does and Doesn't Do

             By Carol Buckmann                            

The question on everyone’s mind since the Fifth Circuit decision invalidating the Fiduciary Rule has been: if the Rule is truly dead, what will replace it? Will we go back to the old five part test with all its loopholes, including one for “one time advice”? Will states be able to regulate in this area despite broad ERISA preemption? What will the SEC do?

The SEC Steps Forward. On April 18, one of these questions was answered when the SEC adopted proposed rules of its own on broker and RIA responsibilities for retail accounts. The SEC, of course, establishes rules that apply to both retirement and non-retirement accounts, and a consistent treatment of accounts is desirable.  The financial community’s criticism that the DOL’s Rule was unduly complicated and restrictive also had merit.  A simpler approach that effectively curbed abuses would be desirable, but has the SEC done that?  Given that the SEC proposal makes it much more likely that the DOL will not appeal the Fifth Circuit decision, it is also fair to ask what protection might be lost under the SEC proposal.

How Far Did the SEC Go? The Dodd Frank Act gave the SEC authority to establish uniform rules for advisers and brokers, but this proposal doesn’t do so.  When compared to the DOL Rule, there are gaps and ambiguities that call into question how effective the proposed rule would be in curbing broker abuses, though there is a 90 day comment period and the SEC proposal is likely to be revised in response to the comments.

The SEC Approach vs. the DOL Approach.

Here are some of the main differences in the approach of the two agencies:

·       The DOL Rule makes brokers who provide investment recommendations fiduciaries, but the SEC proposal doesn’t do so. The proposed SEC standard has been described as “suitability plus”.  It is a step up from the current rule that brokers must recommend “suitable” investments, but it is not clear how much broker responsibilities would be increased because important terms, such as “recommendation”, are not defined in the SEC proposal.

·       The DOL Rule covered the sale of fixed annuity products, but the SEC proposal does not.

·       The DOL Rule imposed a requirement that recommendations be in the investor’s “best interest” that was fleshed out by specific prohibitions and the BICE exemption. The SEC proposal relies on disclosure and a looser, more subjective “best interest” standard for brokers. The DOL Rule bans specific practices that could be permitted under the SEC proposal, such as higher commissions for certain products.

·       Brokers are not required to eliminate conflicts under the SEC proposal.

·       Investors could sue to enforce the Fiduciary Rule, but there is no private right of action or rescission right under the SEC proposal. Investors could be required to arbitrate under FINRA rules.

Where Do We Go From Here? The SEC proposal is about 1000 pages in all, and these are only some of the differences. While the securities laws have traditionally dealt with conflicts of interest by disclosure, disclosure alone is not viewed as curing conflicts under ERISA.  In addition, our ERISA experience with participant fee disclosures has been that they are either not read or not well understood by participants.  Would new SEC-mandated disclosures receive more attention?  Would the SEC’s looser Best Interest Standard curb abusive behavior sufficiently? Let’s hope that comments lead to a tightening of the SEC proposal to make it workable but also more effective in protecting less sophisticated investors.

Will the DOL Fiduciary Rule Really Die?  AARP and the states of California, New York and Oregon have just filed to intervene to appeal the decision invalidating the Fiduciary Rule on the assumption that the Trump Department of Labor will not defend it.  It will be interesting to see whether they will be allowed to step in as representatives of those affected by the Rule.

What About State Laws? Look to more states to follow the lead of Nevada and Massachusetts in trying to establish conduct standards of their own-and the resolution of the question whether ERISA’s preemption clause prevents them from doing so.