Biden's proposed fiduciary rule would spare riskless transactions

The fine print of a revised fiduciary rule proposed by the Biden administration carries a potential impact on the corner of the municipal market that engages in "riskless principal transactions" for taxable munis.

The Department of Labor's proposed Retirement Security Rule would increase regulations around which kind of financial advice and transactions on retirement accounts would be subject to the fiduciary rule under the Employee Retirement Income Security Act of 1974.

Provisions that expand the occasions under which an advisor becomes a fiduciary — including, for example, recommendations about rolling over plan assets — has garnered the most attention and opposition from various industry groups since the Biden administration unveiled the proposal on Oct. 31.

For the muni market however, the biggest impact would come from an amendment to prohibited principal transactions that would spare so-called riskless transactions, when a broker purchases and then sells bonds almost simultaneously, taking on the role of principal to fill the order but avoiding risk by immediately selling the position before the market can move.

The DOL proposal would "tweak" the kind of principal transactions that are prohibited in the context of being a fiduciary to exempt riskless transactions, said Michael Decker, senior vice president of policy and research for the Bond Dealers of America.

"Riskless principal transactions are important to the municipal markets because thousands are done every day," Decker said. "That's the main change from our perspective that affects fixed-income."

The DOL has floated a definition that "means a transaction in which a financial institution, after having received an order from a retirement investor to buy or sell an asset, purchases or sells the asset for the financial institution's own account to offset the contemporaneous transaction with the retirement investor."

Adding that definition "provides clarity regarding which transactions qualify as riskless principal transactions," the DOL said, and asked for industry comments on the definition.

Technically the rule applies to all municipal bonds, but "in a practical sense it's only taxable because nobody holds tax-exempts in their retirement accounts," Decker said.

The Bond Dealers of America is still "working through its position" before the January comment due date, he added. But "at first glance, the exclusion of riskless principal transactions from prohibited principal transactions is welcome, and we'll be checking to see if the Department of Labor got the definition of 'riskless principal' right."

The revised guidance marks the latest attempt at boosting regulation on investment advice for retirement accounts. A 2016 effort by the Obama administration was struck down by the courts in 2018 as overly broad.

On Wednesday, the DOL denied a request from several trade groups to extend the comment period on the nearly 500-page rule by another 60 days. Comments remain due on Jan. 2.  

House Republicans hoping to block the rule this week introduced an amendment to the labor department's fiscal 2024 appropriations bill that prohibits using any funds to "finalize, implement, or enforce the proposed rule entitled 'Retirement Security Rule: Definition of an Investment Advice Fiduciary' or any substantially similar rule."

The White House said it would veto the bill if it made it to Biden's desk. "The administration strongly opposes sections …of the bill, which would prevent DOL from using funds to administer, implement, or enforce rules providing critical protections of workers' wages and retirement plans," Biden said in a statement.