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Regulation and Compliance > Federal Regulation > DOL

New DOL Fiduciary Rule Will Be Crushed in Court: SIFMA

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The Securities Industry and Financial Markets Association urged the Labor Department on Tuesday to withdraw its new fiduciary rule proposal and warned that it “will not will not survive judicial scrutiny.”

“Virtually the entire proposal is inconsistent” with the U.S. Court of Appeals for the Fifth Circuit’s decision, which overturned Labor’s 2016 fiduciary rule, “including the various new exemption changes, which are overly prescriptive and unnecessary,” SIFMA wrote in its comment letter.

SIFMA urged Labor “to abandon” its latest attempt to amend its definition of fiduciary regulation defining investment advice fiduciary, as well as the accompanying prohibited transaction exemption amendments.

Many of the changes proposed in the 2023 rule “are more troublesome” than those proposed in the 2010 and 2016 fiduciary rules, SIFMA said.

“They will not withstand judicial scrutiny,” SIFMA stated. “We believe the proposed amendments will hurt investors, limit the offerings in fiduciary accounts, and require retirement investors to open self-directed brokerage accounts in addition to their advisory account, solely to access the range of investments that they have today.”

Wall Street’s trade group also complained that Labor’s “inadequate comment period, truncated and interrupted by a hearing and multiple holidays (both federal and state, as well as days of religious observances), adversely and unfairly affects this rulemaking.”

The comment period on Labor’s proposal ends Tuesday.

The department has denied two requests to extend the Jan. 2 deadline for comments on its new fiduciary rule proposal.

The plan “includes an overly broad new definition of fiduciary, with overly narrow exemptive relief,” SIFMA said, adding that “It is clear from this proposal that the Department intends to turn many ordinary communications between individuals into ERISA fiduciary conversations.”

Then, SIFMA continued, “once the Department makes these conversations ERISA fiduciary conversations, individuals will only be able to receive relief by fitting within” PTE 2020-02, which covers rollover advice.

Labor, according to SIFMA, “is using a one-size-fits-all approach which was never the intent of Congress when providing the Department with the ability to issue exemptions.”

Even more troubling, according to SIFMA, “the Department’s herding of financial institutions and transactions into a single, highly prescriptive exemption is plainly an improper attempt to regulate both plans and IRAs using its deregulatory authority to issue exemptions from the prohibited transaction provisions of ERISA and the Tax Code — just like it did with the 2016 package.”

By “significantly expanding the definition of ‘fiduciary,’ and using that expansive definition to leverage tightened requirements under an amended PTE 2020-02, the Department is inviting litigation that will invalidate not merely these new amendments but also the original PTE 2020-02, which, while imperfect, had gained a measure of acceptance within the industry,” SIFMA maintained.

‘Inconsistent’ With Reg BI

In attempting to justify the new rules, Labor “suggests that it is simply trying to harmonize ERISA’s regulation of investment advice with SEC rules on a best interest standard,” SIFMA wrote. “While SIFMA’s members comply with the SEC’s Reg BI standard, and believe it is a strong standard,” Labor’s plan “is inconsistent with many aspects of Reg BI.”

While “nothing in Reg BI covers recommendations that are not individualized to the client,” under Labor’s plan, “casual suggestions to large groups can constitute fiduciary advice if other assets are managed by an affiliate,” SIFMA said.

Labor ”must make explicit that neither statements in marketing materials or marketing in public media is an acknowledgement of fiduciary status,” the trade group advised.

Reg BI applies when making an individualized recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, the trade group explained.

However, in Labor’s new fiduciary plan, “if other accounts of the retirement investor are managed on a discretionary basis by the financial professional or an affiliate, a non-individualized recommendation can be subject to the fiduciary rule,” the group said. “We think this is the wrong approach. All recommendations must be individualized to constitute fiduciary advice.”


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