The political landscape in Washington has changed in the year since the SEC's best-interest standard took effect, which could mean different interpretations and enforcement practices from regulators. But the attention among investment-advice stakeholders this month is focused on the Department of Labor, as it announced plans to issue a proposed rule that could broaden who's considered a fiduciary under ERISA.
The rule-making, unveiled as part of the Labor Department's semiannual regulatory agenda June 11, would amend the regulatory definition of the term fiduciary "to more appropriately define when persons who render investment advice for a fee to employee benefit plans and (individual retirement accounts) are fiduciaries" within the meaning of the Employee Retirement Income Security Act and the Internal Revenue Code, according to a Labor Department explanation.
Moreover, the amendment would "take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment market- place, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest," the department said.
"There are a lot of career people at the DOL still working there and it's not clear to me that their views would have necessarily changed just because of the 5th Circuit's action," said Joshua A. Lichtenstein, an ERISA and benefits partner in New York who heads Ropes & Gray LLP's ERISA fiduciary practice. "So I am expecting to see a pretty fulsome rewrite of the definition of who is a fiduciary."
In 2018, a three-judge panel at the 5th U.S. Circuit Court of Appeals in New Orleans vacated a Labor Department rule, commonly known as the fiduciary rule, in a 2-1 decision because it said the department exceeded its legal authority.
The fiduciary rule, finalized in 2016 under the Obama administration, broadened the definition of when a person or entity was taking on fiduciary responsibilities and replaced the five-part test used to determine whether an investment professional or financial institution is a fiduciary.
The Labor Department last year under the Trump administration reinstated the five-part test and in the preamble to an investment-advice exemption that took effect in February, said the five-part test applies to rollover recommendations.
"I think there's concern in the department and in general that people go from retirement plans to IRAs — a retail environment where there are higher costs, less protections from conflicts of interest and there isn't a fiduciary standard," said Fred Reish, a partner in Faegre Drinker Biddle & Reath LLP's benefits and executive compensation practice group. "It's not so much about a person 30 years old leaving their job and putting money in an IRA, this is really about baby boomers retiring in a defined contribution world."