Academic journal article Emory Law Journal

Off-Key Regulation: Examining the Sec's and the Dol's Dissonant Regulation of Broker-Dealers

Academic journal article Emory Law Journal

Off-Key Regulation: Examining the Sec's and the Dol's Dissonant Regulation of Broker-Dealers

Article excerpt


In February 2015, the Council of Economic Advisers (CEA) reported that retirement investors lose approximately $17 billion each year due to receiving investment advice from broker-dealers who have a conflict of interest.1 The CEA also reported that affected investors lose approximately 1% in investment returns annually.2 A year later, in April 2016, the Department of Labor (DOL) estimated that underperformance due to conflicted investment advice could cause individual retirement account (IRA) investors in the mutual funds segment alone to lose up to $189 billion over the next ten years and $404 billion over the next twenty.3

To mitigate these losses, the DOL under the Obama Administration promulgated a final rule, known as the "fiduciary rule."4 The primary purpose of this rule was to prevent broker-dealers from providing investment advice when they have a conflict of interest;5 in other words, the fiduciary rule aimed to prevent broker-dealers from providing investment advice that is influenced by their ability to profit, not their customers' ability to do so. The practical consequence of this rule would have been to elevate broker-dealers, who usually must adhere to a lower standard of conduct, known as the suitability standard, to fiduciary status.6 As fiduciaries, broker-dealers would have been required to act in their customers' best interest, as opposed to an interest suitable to their customers, which is the current standard.7

The applicable date of the fiduciary rule was originally scheduled for April 2017.8 But in early February 2017, just weeks after taking office, President Trump signed a memorandum calling on the DOL to reassess the Obama Administration's fiduciary rule.9 Specifically, President Trump directed the DOL to review (1) whether the final rule was consistent with the policies of his Administration, and (2) how it would affect retirement investors' access to financial advice.10 To provide more time to conduct its analysis, the DOL delayed the effective date for full implementation of the rule and its exemptions from January 2018 to July 2019.11

President Trump's memorandum and the DOL's ensuing delay in implementing the fiduciary rule as passed not only afforded the DOL additional time to assess the merits of the fiduciary rule, but also had two additional consequences. First, it provided the courts more time to determine whether the DOL exceeded its authority under the Employee Retirement Income Security Act of 1974 (ERISA) in promulgating the fiduciary rule. Although the Tenth Circuit had upheld the fiduciary rule just days earlier,12 the Fifth Circuit vacated the rule in toto in mid-March 2018.13 The DOL had until the end of April to file an appeal, but it chose not to,14 and third-party efforts to intervene were denied by the Fifth Circuit.15 Thus, the fiduciary rule is officially dead, halting the DOL in its tracks and forcing other interested parties, like academics and professional interest groups, to rethink their arguments either for or against the DOL promulgating its fiduciary rule.16

Second, the delay afforded the Securities and Exchange Commission (SEC) additional time to consider the merits of imposing a uniform fiduciary standard that could apply to all broker-dealers who provide personalized investment advice.17 The rule being vacated cleared the slate for a possible SEC rule unimpeded by the DOL's fiduciary rule. Indeed, only a month after the fiduciary rule was initially vacated, the SEC proposed multiple rules in mid-April 2018, one of which was called Regulation Best Interest.18 The SEC's movement here was and is significant because, while the DOL believed it had the authority to modify the standard of conduct for financial advisers of nearly $19 trillion in retirement assets under ERISA19 until the Fifth Circuit rejected such a statement of authority, the SEC's authority to regulate financial advisers is far greater, covering nearly $67 trillion in investment assets. …

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