We are issuing the latest update to our recent Alerts regarding the final rules issued by the Department of Labor (“DOL”) with respect to fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL’s Best Interest Contract Exemption (“BIC Exemption”) from ERISA’s prohibited transactions provisions as well as Congress’s attempts at blocking implementation of the ERISA fiduciary rule and BIC Exemption. On May 4, 2017, the House Financial Services Committee approved by a vote of 34 to 26 legislation which would among other things void the ERISA fiduciary rule and BIC Exemption. The legislation voiding the ERISA fiduciary duty rule and BIC Exemption is part of a much larger bill known as the “Financial Choice Act of 2017” (H.R. 10) which is intended to replace large portions of the Dodd-Frank Act. The bill is a revised version of the “Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act of 2016” legislation that had originally been introduced into the House by Rep. Jeb Hensarling (R-Tx), the Chairman of the House Financial Services Committee, in September 2016.
The portion of H.R. 10 relating to the ERISA fiduciary rule and BIC Exemption is contained in Section 841. Section 841(a), entitled “Repeal of Department of Labor Fiduciary Rule and Requirements Prior to Rulemaking Relating to Standards of Conduct for Brokers and Dealers,” would void the ERISA fiduciary rule and BIC Exemption. This section provides that “[t]he final rule of the Department of Labor titled ‘Definition of the Term ‘Fiduciary’; Conflict of Interest Rule -- Retirement Investment Advice’ and related prohibited transaction exemptions published April 8, 2016 (81 Fed. Reg. 20946) shall have no force or effect.” Section 841(b) of the bill bars the DOL from promulgating any replacement fiduciary rule until 60 days after the Securities and Exchange Commission (“SEC”) issues its “final rule relating to standards of conduct for brokers and dealers pursuant to the second subsection (k) of Section 15 of the Securities Exchange Act of 1934 (‘Exchange Act’) (15 U.S.C. 78o(k)).”In the event, following this stay, the Secretary of Labor determines to promulgate a new rule, H.R. 10 requires him to mirror such rule on the rule issued by the SEC. Section 841(c) mandates the Secretary of Labor to “prescribe a substantially identical definition of what constitutes fiduciary investment advice and impose substantially identical standards of care and conditions as the [SEC] has imposed on brokers, dealers, or investment advisers.” Section 841(d) of the bill (which amends the second subsection (k) of Section 15 of the Exchange Act, supra) imposes a number of requirements on the SEC before it seeks to issue its own fiduciary rule. Specifically, the bill restricts the SEC from promulgating its own fiduciary rule until it submits a report to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs addressing whether:
- retail investors “are being harmed due to brokers or dealers operating under different standards of conduct than those that apply to investment advisors under section 211 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–11);”
- “alternative remedies will reduce any confusion or harm to retail investors due to brokers or dealers operating under different standards of conduct than those standards that apply to investment advisors….;”
- “the adoption of a uniform fiduciary standard of conduct for brokers, dealers, and investment advisors would adversely impact the commissions of brokers and dealers, the availability of proprietary products offered by brokers and dealers, and the ability of brokers and dealers to engage in principal transactions with customers;” and
- “the adoption of a uniform fiduciary standard of conduct for brokers or dealers and investment advisors would adversely impact retail investor access to personalized and cost-effective investment advice, recommendations about securities, or the availability of such advice and recommendations.”
H.R. 10 requires the SEC to support its conclusions by economic analysis. Finally, in the event the SEC determines to promulgate a fiduciary rule, the bill requires the SEC to publish along with the rule “formal findings that such rule would reduce confusion or harm to retail customers … due to different standards of conduct applicable to brokers, dealers, and investment advisors.”
Significantly, the Financial Choice Act of 2017 does not require the SEC to actually promulgate a fiduciary rule. Instead, the legislation only establishes the conditions which the SEC must meet if it chooses to issue such a rule. Thus, if the SEC opts not to promulgate a fiduciary rule, the DOL will be unable to proceed with its own rule. In other words, the Financial Choice Act of 2017 prohibits the DOL from acting on its own or “rogue” with respect to a fiduciary rule.
It is unknown when the Financial Choice Act of 2017 will be voted on by the full House. There is no companion bill currently pending in the Senate. In the event this legislation passes the House and Senate (with Section 841 remaining substantially intact) and is signed into law by President Trump, the Financial Choice Act of 2017 will supersede and void altogether whatever version of the Fiduciary Rule may exist following the review of the Fiduciary Rule which the DOL is currently undertaking in accordance with President Trump’s February 3, 2017 Memorandum.