SEC Best Interests . . . When? And What About the DOL

I am writing two series of articles that together are called “The Bests.” One is about Best Practices for plan sponsors, while the other is about the Best Interest Standard of Care for advisors. Each series is numbered separately to make it easier to identify the subject that is most relevant to you.

This is the third of the series about the Best Interest Standard of Care.

The Regulatory Agendas for the SEC and DOL were recently issued. Both have plans for guidance by September of 2019, but the anticipated timing of the guidance has, by and large, been misinterpreted. To understand what I mean, read on.

The SEC’s Agenda said that Final Action on the Regulation Best Interest proposal for broker-dealers and the Interpretation of Standard of Conduct for investment advisers would be “09/00/2019.”

Similarly, the Department of Labor Agenda said that there would be a final rule on the “Fiduciary Rule and Prohibited Transaction Exemptions” with the date of “09/00/2019.”

Let’s start with the dates. For those inclined towards conspiracy theories, it was interpreted to mean that the DOL and SEC were conspiring to issue combined and comprehensive new fiduciary/best interest rules. But, that doesn’t make any sense. While the two regulators are certainly communicating with each other, that doesn’t mean that there is behind-the-scenes plotting and planning.

Another interpretation was that the SEC and DOL were both going to issue guidance in September 2019. But that’s not right either. This is the short term agenda for the government fiscal year that ends in September, 2019. The September dates just mean that both regulators are planning on getting out their guidance during the upcoming government fiscal year.

Here’s my bet on what the dates will really be. Based on meetings with the SEC, it appears that Reg BI and the RIA Interpretation are moving along towards completion. That probably means that the final rules will be completed near the end of the first quarter or early in the second quarter of 2019. There will then be a delayed implementation date. That could be January 1, 2020, or even later, e.g., one year after the final rule is published.

As a word of warning, though, the SEC takes the position that most of the guidance in the RIA Interpretation reflects the Commission’s view of the current requirements for RIAs. There are only three true proposals in the Interpretation and none of those deal with the standard of care.

What about the DOL? I believe that the DOL’s guidance will be sequential rather than concurrent. By that I mean that the DOL’s guidance will probably be, to a large degree, based on the SEC’s final rules. As a result, their guidance will follow the SEC’s, rather than being released at the same time.

I think the DOL guidance will, at the least, include a new class exemption to cover prohibited transactions resulting from nondiscretionary fiduciary investment advice. It would replace the joint DOL/IRS non-enforcement policy (Field Assistance Bulletin 2018-02). My best guess is that it would include, as some of its conditions, compliance with parts of Reg BI and perhaps even the RIA Interpretation. But, I think that it will also include the Impartial Conduct Standards, that is, adhering to the DOL’s best interest standard, receiving no more than reasonable compensation, and making no materially misleading statements.

It’s less clear what the DOL plans to do about the fiduciary rule. There may be nothing. On the other hand, there may be some tinkering, for example, saying that a fiduciary under the securities law is also a fiduciary under ERISA. That would obviously cover RIAs. However, I don’t see any possibility that the Department would re-propose the vacated Fiduciary Rule or anything close to it.

Caveat: The future in unknowable. The educated guesses in this article are just that . . . “guesses.” But they are educated by experience and information. Don’t take them to the bank, but don’t toss them out either.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.