SEC building In the comingmonths, both the SEC and DOL are expected to begin issuing a numberof new rules and proposals as part of their “harmonization”efforts. (Photo: Diego M. Radzinschi/ALM Media)

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“Harmonization” is the buzzword that we keep hearing fromregulators of the retail advice space.  The SEC used theword in the title of its recent concept release on privatesecurities offering exemptions.  DOL Assistant SecretaryPreston Rutledge used the same word in recent comments on the SEC’sReg BI by stating that DOL’s goal is to “align, build up, andharmonize with [the SEC’s agenda].”  In the coming months,both the SEC and DOL are expected to begin issuing a number of newrules and proposals as these “harmonization” efforts come intodaylight.  Key areas of focus may include rolloverrecommendations, electronic disclosure, and permissibleinvestments.

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First, rollover recommendations have in the past been and remaina key focal point for the SEC and DOL.  At times, it hasseemed as though the two agencies have both sought to be theprimary regulator.

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In 2005, DOL issued an advisory opinion claiming that somerollover recommendations are “fiduciary” recommendations withinDOL’s regulatory orbit.  Later, in its later-nullified2016 Fiduciary Rule, DOL asserted significant oversight of rolloverrecommendations generally.

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Last year, the 5th Circuit struck down DOL’s attempt to expandits oversight of the rollover market stating that Congress“with[held] from DOL … regulatory authority over IRAplans.”  In June 2019, the SEC, in Reg BI issued specialrules, containing new investor protection for brokers who makerollover recommendations.

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Because rollovers have been an area where both regulators haveindependently issued guidance, any “harmonization” may well starthere.

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Second electronic disclosure is another area where the SEC andDOL could harmonize to reduce plan and adviser compliance costswithout negatively impacting retail investors.  Over thelast few years, the SEC has begun modernizing its electronicdisclosure framework.

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Most recently, in June 2018, the SEC adopted new rules thatallow mutual fund companies to more easily transmit shareholderreports to shareholders electronically.  This was awelcome development as paper delivery generates expensive printingcosts and can be less effective as paper mail takes time and canbecome lost.

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In August 2018, President Trump issued an executive orderdirecting DOL to study whether “broader use of electronic delivery”would “improve the effectiveness of disclosures” and “reduce theirassociated costs and burdens.”  Because DOL rules werecrafted long before the current day era of mobile internet andwidespread broadband adoption, increased harmonization of SEC andDOL rules is a significant potential opportunity.

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Third, the SEC has identified another area where retailinvestors could benefit from the harmonization of rules surroundingretirement plans.  Right now, defined benefit plans caninvest in private funds.  In most cases, definedcontribution plan participants cannot.  The disconnect inhow the SEC’s accredited investor rules treat defined benefit plansversus how the rules treat defined contribution plans has created alandscape where defined benefit plans have greater access todiversifying asset classes.

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In its recent “Concept Release on Harmonization of SecuritiesOffering Exemptions”, the SEC appears to be considering givingdefined contribution plan participants access to the same types ofinvestments that have historically been limited to defined benefitplans.

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Whether the SEC and DOL are able to release final rules orupdated guidance in any of these areas remains to be seen.

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However, there is reason to be optimistic that over the next fewmonths we will begin to see proposed rules and subregulatoryguidance that provides for a more unified regulatory framework fordefined benefit and defined contribution plans as well as morecomplimentary rules in areas where the DOL and SEC both exercisejurisdiction.

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Kevin Walsh is a principal at the Groom Law Group. Headvises clients on a wide range of “standard of care” matters. Hispractice encompasses helping retirement plan service providers,including registered investment advisers and broker-dealers, complywith the Department of Labor’s fiduciary rules, the SecuritiesExchange Commission’s best interest rules, FINRA’s suitabilityrules, and evolving state care standards.

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David N. Levine is a principal at the Groom LawGroup, where he advises plan sponsors, advisers, and other serviceproviders on a wide range of employee benefit matters, includingretirement. He was previously the chair of the IRS AdvisoryCommittee on Tax Exempt and Government Entities and is currently amember of the executive committee of the Defined ContributionInstitutional Investment Association.

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