Today the U.S. Department of Labor published a new rule that will help ensure American workers and retirees have access to high-quality investment advice at a fair price. The Labor Department’s action dovetails with a package of investor-oriented measures adopted last year by the Securities and Exchange Commission. For the first time, our agencies are aligned on a coherent framework centered on ensuring that American workers and retirees receive advice in their best interest, across the spectrum of investment professionals and account types.
A strength of the U.S. financial industry is the wide array of investment advisers, brokers, dealers, banks and insurance agents available to assist investors. The new Labor Department rule—coupled with steps the SEC took last year—establishes high standards of conduct for the many people providing these services. In doing so, we improve the financial-services sector while preserving access (in terms of choice and cost) for investors with an array of needs and objectives. The advisers, brokers and others covered by these conduct standards are now clearly prohibited from putting their interests ahead of the interests of the investors they serve.
Our efforts complete the task of replacing a flawed, stand-alone rule promulgated by the Obama Labor Department. That 2016 rule sought to impose a one-size-fits-all approach that would have made it more difficult both for financial professionals to provide meaningful advice and for investors to find the combination of products and services that worked best for them.
The prior rule also sought to leverage Labor’s jurisdiction over retirement accounts to expand the administration’s preferred structure for the investor-financial professional relationship across the entire financial-services sector, trumping existing standards in the securities laws. In 2018 a federal appellate court called out this overreach and struck down the rule as an “arbitrary and capricious exercise of administrative power.”
In that rule’s place we now have rigorous standards that are rooted in common fiduciary principles yet are sufficiently flexible to accommodate a range of investor preferences.
The first step toward this goal was the SEC’s adoption of “Regulation Best Interest” last year, which substantially enhanced the standard of conduct for broker-dealers, bringing them in line with reasonable investor expectations. Under that rule, a broker-dealer can continue to make recommendations under a variety of common compensation structures, but must identify—and, at a minimum, disclose or eliminate—all conflicts of interest (and must specifically mitigate or eliminate some). Ultimately, the broker-dealer can’t place his own interests ahead of the customer’s. The SEC also issued other rules and interpretations, including one reaffirming—and in some cases clarifying—the standard of conduct for investment advisers.
Combined, these new rules and interpretations ensure individual investors receive recommendations or advice in their best interest, regardless of whether they choose a broker-dealer or investment adviser.
In the second step, the Labor Department is adopting today an exemptive rule that harmonizes its framework with the SEC’s, while assuring due protection for workers’ retirement investments. For fiduciaries who provide investment advice covered by the Employee Retirement Income Security Act, or Erisa, Labor is providing a new alternative that will permit reasonable compensation, regardless of form, for fiduciaries who clearly state they are providing advice and follow standards designed to protect retirement investors using both 401(k) plans and individual retirement accounts. The Labor Department requires those serving in a fiduciary capacity and using this new alternative to recommend only products and services that are in the best interest of their clients, and to avoid misleading statements.
Instead of the radical departure of the invalidated 2016 rule, the new rule affirms the longstanding definition of fiduciary, while also clarifying it for the benefit of investors. The Labor Department is also withdrawing a prior opinion letter that suggested that a rollover from a pension plan to an IRA never need comply with safeguards meant to protect retirement investors. This action broadly aligns Labor’s approach to “rollover” advice—one of the most important decisions Main Street investors face—with the substantial, investor-oriented enhancements the SEC added in Regulation Best Interest.
Four years ago, the Labor Department and SEC separately oversaw conflicting, confusing frameworks for regulating financial services. Labor’s action today completes the task of establishing a clear, harmonious and practical framework that empowers Americans to shop for the advice and products that best align with their goals, and to do so with the confidence that their financial professionals will act transparently and that recommendations will be in their best interest.
Mr. Scalia is secretary of labor. Mr. Clayton is chairman of the Securities and Exchange Commission.
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