Congress gave the Department of Labor (“DOL”) – not the Securities and Exchange Commission (“SEC”) — the legal authority and responsibility to write a fiduciary duty rule for retirement advice

Introduction.  Some have claimed that the SEC, not the DOL, should set the fiduciary standards applicable to all financial advisers, even those who serve retirement accounts that were created not under the securities laws but under the labor laws and the tax code.  However, that claim is legally and factually wrong on multiple levels. 

The SEC has no authority to write the rules necessary to implement ERISA. The SEC has no legal authority to issue or update any rules implementing Employee Retirement Income Security Act (“ERISA”). Congress mandated that the DOL, not the SEC, discharge that responsibility, and it did so intentionally, fully aware of the vast regulatory framework it had already created governing securities transactions. 

Congress passed the Investment Advisers Act in 1940 to establish a regulatory regime governing those who give investment advice about securities.  Thirty-four years later, in 1974, fully aware of the regime it had created for SEC-registered investment advisers, Congress determined that a separate regulatory framework, including higher standards of loyalty and care, was necessary to ensure that Americans’ retirement assets were adequately protected from fraud, abuse, and conflicts of interest.  Fueling this initiative was a recognition that retirement assets play a unique and critical role in determining the quality of life for all Americans once they leave the workforce.  In addition, Congress understood the need to create special protections for retirement savings in light of their privileged tax status.  Thus, because all Americans effectively subsidize the important public policy of incentivizing private savings for retirement, these savings deserve special protections, particularly against conflicts of interest.  ERISA was the result, and the DOL has been expressly required by Congress to administer it.  Congress clearly intended the SEC and DOL to oversee distinct sets of rules designed for distinct purposes.[1] 

As former SEC Chair Mary Jo White acknowledged when testifying before the Senate Financial Services and General Government Appropriations Subcommittee in 2015, the DOL and SEC “are separate agencies with separate statutory mandates,” and the DOL fiduciary duty rule relates to its “important” mandate under ERISA.^[2] 

The SEC has no jurisdiction over advice pertaining to any investment that is not a security.  Furthermore, the SEC lacks any authority to regulate advice about investments that are not securities.   Yet, retirement accounts routinely include a variety of non-securities investments, including insurance products, real estate investments, and even commodities.  In stark contrast to the SEC, the DOL has broad authority over all of these assets, as well as any other “moneys” or “property” of a retirement plan.^[3] 

Thus, the SEC – as an indisputable legal matter – could not possibly promulgate a rule that protects retirement savers from any conflicts of interest or other abuses arising from the sale of many financial products commonly found in retirement accounts.  

Section 913 of the Dodd-Frank Act confirms the separate and important role Congress intended for the DOL. Section 913 of the Dodd-Frank Act only reinforces this conclusion.  In Section 913, Congress granted the SEC explicit authority to raise the standards of conduct applicable to broker-dealers who give advice about securities investments. Again in recognition of the two separate roles of the DOL and the SEC, Congress declined in Section 913 to subordinate or alter the DOL’s authority over advisers to retirement savers, or to link it in any way to the SEC’s oversight of securities transactions, broker-dealers, or investment advisers. 

The Harkin Amendment highlights the need for DOL’s independent jurisdiction over all retirement investments, especially those that are not securities. The so-called Harkin Amendment in the Dodd-Frank Act highlights the importance of DOL’s separate authority to regulate advice about all retirement investments, including those that are not categorized as securities.  See DFA  Sec. 989J. 

In that amendment, Congress, in response to lobbying from the insurance industry, prohibited the SEC from regulating fixed indexed annuities (“FIAs”) as securities, categorizing them instead as insurance products. FIAs are among the most often recommended investments for retirees, and they are aggressively sold by insurance agents seeking the exceptionally high commissions they generate.  Yet FIAs are also among the most complex products on the market, and they have often been the subject of abusive sales practices.  Fortunately, Congress’s decision to limit the SEC’s authority over these products did not limit in any way the DOL’s ability to protect retirement savers from the powerful conflicts of interest that motivate financial advisers to promote them. 

The SEC has repeatedly refused to effectively regulate the advisory activities of broker-dealers. As a practical matter, if the DOL’s mandate to protect retirement savers were subordinated to the SEC, then retirement savers would likely never have adequate protection from their advisers’ conflicts of interest.  The SEC has repeatedly refused to ensure that financial advisers in the securities realm abide by a fiduciary duty, even after Congress directed it to do so. 

First, for decades, the SEC has allowed broker-dealers to invoke what was supposed to be a very limited exemption from the fiduciary duty found in the Investment Advisors Act (“IAA”).  It has permitted financial advisers employed by broker-dealers to hold themselves out as trusted advisers, and to perform the same advisory services as registered “investment advisers,” without complying with any version of the fiduciary, or best interest, standard.  This exemption has swallowed the now inapplicable fiduciary standard as to broker-dealers, resulting in a confusing web of titles and legal standards that harm securities investors every day.

Second, the SEC has refused to exercise the explicit authority that Congress granted it in Section 913 of the Dodd-Frank Act to impose a uniform fiduciary duty upon all advisers, thus leveling the playing field between broker-dealer advisers and registered investment advisers while protecting savers and investors of all types.  This, despite the fact that the staff of the SEC conducted a study of the issue, as required by Section 913 of the Dodd-Frank Act, and recommended that the SEC undertake just such a rulemaking initiative.  Thus, the SEC has all the authority and all the information it needs to enact a fiduciary duty, but has refused to do so. 

Conclusion. For all these reasons, the DOL rule is indispensable and the SEC simply is not, as a legal and factual matter, an effective substitute.