The Department of Labor (DOL) is set to finalize its new fiduciary rule by the end of 2019. The rule covers those giving advice regarding retirement accounts regulated by the Employee Retirement Income Security Act (ERISA). At this point, we have little information on what the rule is likely to look like, but there are some clues in place. We know, for example, that the DOL is collaborating with the Securities and Exchange Commission (SEC), which means that the DOL’s rule may mirror the SEC rule, although there are some aspects in which it certainly will not.
As a rule, fiduciaries cannot engage in self-dealing when handling retirement plans, as these would be prohibited transactions. There are, however, some exceptions to this rule, provided the broker meets certain requirements. A well-known prior example of this was the best-interest contract exemption (BICE), though it was later ruled against in court and is no longer available to brokers. It allowed brokers to receive commissions so long as they met certain conditions designed to protect investors, such as allowing them the right to bring class-action lawsuits.
ERISA strives to prohibit all conflicts of interest, which is a very different structure from SEC rules. The SEC doesn’t have prohibited transactions and exemptions; rather the SEC allows brokers and advisors to handle conflict by disclosing it to the investor.
New DOL Rule
With this key difference in mind, it seems likely that the DOL rule will include another prohibited transaction exception. For example, the rule could state that brokers and advisors who meet the SEC’s regulations of disclosure, including the new Regulation Best Interest, would qualify for an exception under ERISA. The DOL could also take a hybrid approach and attempt to mesh the SEC’s disclosure rule with their own additional disclosures.
Another option involves the DOL changing who is considered a fiduciary under ERISA. Under the SEC rule, a broker does not have to also register as an investment advisor if the advice they’re providing is part of their work as a broker. The DOL could issue a similar rule, claiming that a broker is not a fiduciary if the advice they’re providing is incidental to their job. They could even piggyback off the SEC’s definition of incidental advice.
None of these options give a broad best-interest policy like the one included in the fiduciary rule released during the Obama administration. However, as there is still little known regarding the new rule, there is still the possibility of another unique option appearing.