Controversy over the decision by U.S. Labor Secretary Alexander Acosta to go live with the Fiduciary Rule continues.

The Labor Secretary was quoted as having given testimony to the effect that the process by which the rule was adopted was materially flawed and indicating that he intended to reconsider the rule, after it has gone into effect.

In a recent editorial published by The Hill, former SEC Commissioner Paul Atkins urged Secretary Acosta to again consider delaying implementation of the Fiduciary Rule, which is scheduled to become applicable on June 9, 2017. Secretary Acosta had announced on May 22, 2017 that the DOL would not delay the rule’s effective date any further. Mr. Atkins argued that in its current form, the rule threatens to result in meaningfully adverse economic consequences.

Mr. Atkins urged Secretary Acosta to delay the implementation date, cooperate with the SEC in developing fiduciary standards, and conduct a thorough study of the rule’s potential impact that would take more recent data into account. He suggested that the SEC’s June 1, 2017 request for comments on developing standards of conduct affords the DOL a channel through which to legally delay the effective date.

Mr. Atkins criticized the procedural history and development of the rule. He asserted that Secretary Acosta should pay particular attention to the DOL’s lack of cooperation with the SEC, and cited a 2016 U.S. Senate report that he believes indicates that appointees during the Obama administration “actively undermined SEC participation in the rule’s design.” Mr. Atkins also challenged the DOL’s claim that the rule will save investors $17 billion, and referred to an article in which former SEC economist Craig Lewis accused the DOL of “significantly overestimat[ing]” those potential savings.

Lofchie Comment: As Mr. Atkins points out, there are many good reasons for the DOL to delay the implementation of the fiduciary rule, including the current legal challenge before the U.S Court of Appeals for the Fifth Circuit, and the debatable assertion of “$17 billion” in savings made in a 2015 Council of Economic Advisers’ Report supporting the adoption of the rule. Further, the existence of two regulators, the DOL and the SEC, that each have independent suitability rules applicable to the same set of relationships and transactions, is simply bad government from a structural standpoint.

Given that, and given the criticism of the rule voiced by Secretary Acosta himself, it is somewhat unclear why the Secretary is not choosing to delay the Rule’s effective date.  The Secretary appears to be underestimating the disruption that may be caused by allowing a rule to go effective and then subsequently rescinding it or modifying it, as opposed to getting it right the first time.

In Kokesh v. Securities and Exchange Commission (“Kokesh”), the Supreme Court held that a five-year statute of limitations applies to claims for the disgorgement of ill-gotten gains obtained through violations of federal securities laws. Kokesh follows the holding of Gabelli v. SEC in which the Supreme Court determined that the statute of limitations period applies when the SEC seeks monetary penalties.

In Kokesh, Justice Sonia Sotomayor (writing for a unanimous Supreme Court) held that disgorgement “bears all the hallmarks of a penalty” under 28 U.S.C. § 2462. The Court’s analysis was shaped by two guiding principles for determining whether sanctions represent penalties: (i) such penalties typically exist where the wrong that is to be redressed was committed against the public, and (ii) the purpose of a penalty is to deter similar conduct rather than to compensate a victim for loss. In Kokesh, the Supreme Court held that SEC disgorgement constitutes such a penalty.

SEC Chair Jay Clayton solicited comments on “standards of conduct for investment advisers and broker-dealers.” Chair Clayton argued that the implementation of the Department of Labor (“DOL”) fiduciary rule (beginning on June 9, 2017) might have significant effects on SEC-regulated entities. In addition, he argued that financial sector developments over the past several years necessitate a new evaluation of conduct standards for advisers and broker-dealers:

“Given the significance of these issues — in particular, for retail investors looking to save for the things that matter most to them, including homeownership, education, and retirement — I look forward to robust, substantive input that will advance and inform the SEC’s assessment of possible future actions.”

The Chair solicited comments on:

• possible changes to investment adviser and broker-dealer disclosure requirements;
• how technological advances have impacted the manner in which investment advice is provided;
• the impact of early Fiduciary Rule compliance efforts on market participants and investors;
• standards for classifying a “retail investor”; and
• different potential SEC approaches to developing conduct standards.

Comments can be submitted via email or webform.

Lofchie Comment: Whatever one thinks of the appropriate standards of conduct that should apply to broker-dealers and investment advisers doing business with retail investors, it is simply an absurd notion that the Department of Labor should set one standard for conduct as to certain assets and the SEC should simultaneously set general standards of conduct. Congress should direct that standard-setting as to retail securities transactions is within the exclusive purview of the SEC.