Trust law is instructional to ERISA, and the Uniform Prudent Investment Act offers a definition of prudence. Both give guidance on fiduciary responsibility, the highest industry standard.
So, one must question why the Department of Labor (DOL), whose mission statement is “to foster, promote, and develop the welfare of wage earners, job seekers, and retirees,” would repropose a rule that would “align and coordinate” itself to a lower non-fiduciary standard, like the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).
Perhaps investors ought to wonder why a reduction in standards is a positive change. Many with actual functional experience in financial services may also be wondering why FINRA, the self-regulatory organization that is supposed to regulate retail financial advice, has been ignored. In addition, many of the same people may not be clear on how Reg BI’s “Best Interest” is significantly different from FINRA’s Rule 2111 or Reg BI’s “Compliance” from FINRA’s Rule 3120.
This lower standard, the one that is supposed to protect investors and revised by an agency that is supposed to protect “wage earners,” will clearly align itself better with another lower standard like the National Association of Insurance Commissioners’ (NAIC) revised annuity suitability rule.
So, does this improve investor protection, and if not, whose interest does it protect?
When one determines whether a regulation has been adhered to, the actions and methodologies that led to outcomes must be examined and reverse engineered.
To start with, Eugene Scalia is the U.S. Secretary of Labor and a former partner in the Washington D.C. office of the law firm Gibson, Dunn & Crutcher, and has a long record of defending major corporations against financial and labor regulations.
In fact, Scalia represented the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and other associations in successful challenges against the DOL’s original proposed fiduciary rule. In effect, an attorney who has fought for corporate interests against the DOL’s proposed fiduciary rule is now in charge of the DOL.
The irony here is that ERISA may characterize Scalia as someone with a potential conflict of interest, which happens to be something that a fiduciary is supposed to avoid. Most people are under the impression that attorneys try to remove conflicts of interest from court proceedings.
In at least one article (DOL Finalizes Electronic Disclosure Rule for Retirement Plans), Scalia stated, “this rule is an outstanding example of how commonsense de-regulatory efforts can save billions of dollars.”
So, he made it clear that this was a “de-regulatory” effort. Remember that previously mentioned mission statement of the DOL? One may wonder if saving billions of dollars for corporations via a “de-regulatory effort” is more consistent with the mission statement of the agency he is in charge of or an attorney representing business interests like his previous role.
As for the role of the SEC:
The U. S. Securities and Exchange Commission (SEC) has a three-part mission:
- Protect investors
- Maintain fair, orderly, and efficient markets
- Facilitate capital formation
REG BI and the DOL’s re-proposal have additional disclosures that afford the delivery of, for at least some of them, electronically. One can argue that disclosures cannot dismantle fiduciary duties once a fiduciary relationship has been established, and electronic distribution makes delivery easier, but not comprehension nor should it reduce the liabilities that a fiduciary has.
The electronic delivery of disclosures makes it even easier for an advisor because they are not required to determine if a client understands these disclosures, at least with regards to the SEC’s standard of conduct regarding loyalty, because the client only needs to provide informed consent.
So, somehow Best Interest and loyalty can be reduced via disclosure that evidences informed consent and somehow demonstrates that an advisor did not place their own interests ahead of the clients.
Harmonizing rules and regulations that meet a lower standard, a non-fiduciary one, does not provide improved or additional protection to investors. It does, however, make it easier for those who supposedly have the duty to fulfill regulations to avoid that responsibility, reducing their potential exposure to litigation.
About the author: Neal Shikes is Managing Partner of The Trusted Fiduciary, based in New York City, which provides employer-sponsored retirement plan and fiduciary consulting.
Disclaimer: The opinions expressed above are that of the author and do not necessarily represent those of 401k Specialist.
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