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Department of Labor pushes back Fiduciary Rule Implementation

DOL Fiduciary rule implementation delayed for another 60 days through June 9, 2017

Amidst a flood of comments and opposition of the DOL Fiduciary Rule, the Department of Labor has pushed back the April 10 effective date to June 9 2017.  The DOL rule sets a strict standard for any advisor or representative selling financial products funded by retirement dollars to follow a “Best-Interest” standard or face the threat of class-action liability.

DOL Fiduciary RulePublic comments on the Fiduciary Rule were re-opened March 1, soon after the new administration took over under Trump. The administration tasked the DOL with determining whether the rule change would add undo cost burden on the industry and investors, and review whether it would actually improve retirement advice for Americans. During the short 15 day window a flood of comments from firms, industry organizations, and individuals on either side of the issue poured in. 

Comments in opposition to the DOL Fiduciary Rule change

Many opposed to the DOL rule point to the clause permitting class action lawsuit against advisors by investors who feel they got burned. Advisors who represent small retirement savings investment accounts feel most at risk. For these advisors serving the smaller savings market, threat of personal lawsuit adds a layer of risk that cannot be passed on to their limited number of small investment accounts in the form of higher monthly fees or charges. Its likely the risk will drive many advisers serving smaller accounts out of the market; leaving only large firms with resources to absorb the cost of protecting against lawsuit to serve small account investors.   

Others cite that the continual complexity and changing landscape of regulation is an unfair burden on small firms. The added cost of new rules coupled with heightened threat of litigation is insurmountable. Small firms are already stretched thin trying to keep up with regulatory changes. Many suggest an increasing number of small firms would likely choose to merge their practice with a larger firm because of the added risk to doing business. Small firm members are frustrated by continuous complex legislation that present little benefit to investors, citing broker-dealer member firm withdrawal rates at 20 firms per month, while new member firms are added averaging only 10 per month; a loss of 10 firms per month which are mostly small member firms (based on 3 year average).

Comments supporting the DOL Fiduciary Rule change

Most comments in favor of the DOL rule come from investors; who stand to see a benefit from the “Best Interest Contract” (BIC). The BIC component forbids variable commissions on retirement account transactions; citing commission structures are not in the “best interest” of consumers. However, the “Best Interest Contract” does provide an option for advisors and representatives to negotiate an agreement with their investor for commission based fees. Essentially the parties sign an agreement where the advisor pledges they will act in the clients’ best interest and disclose all fees they receive.  This agreement is backed up with a clause allowing investors to take action in a class suit against their advisor to recover losses from misguided advice.

Regulators insist that protections to retirement savers should be fee based only and free from conflicted advice or incentivized commission based fees. They assert that a lesser standard allows advisors to recommend products that may be ‘suitable’ but not in the clients’ best interest. Proponents assert the rule regulates professional conduct and protects investors against misleading or biased advice. 

Trump memorandum to Secretary of Labor requesting review of the Fiduciary Rule

Upon taking office in January 2017 the new administration requested a review of the Fiduciary Standard Rule and vowed to take a stand against rules that impede market growth. The memorandum requests that the bill be analyzed against 3 economic and legal factors; 1) does the legislation reduce American’s access to retirement products and advice; 2) does it create a disruption to the industry that materially reduces its ability to properly serve clients and; 3) is the legislation likely to adversely impact market pricing and by how much.

Generally the new administration has opinioned, regulation is too restrictive with rule upon rule adding complexity to operations of financial industry firms. Suggesting its possible this, in part, is the root cause for steady decline of broker-dealer membership in recent years. 

Large Brokerages forging ahead with DOL Change

Regardless of further analysis and delay in implementation, large broker-dealer firms are pushing ahead to adopt the new fiduciary standard in anticipation it will be implemented. A few are already reaching out to clients with replacement products that do not carry commission based conflicts. Others, such as Merrill Lynch, have opted to discontinue offering commission based accounts altogether. Morgan Stanley and Wells Fargo are offering commission-based products by providing their brokers a best interest contract to sign with clients.

For the moment, Phase I enforcement of the rule is delayed until June 9, 2017. 

Phase I requires compliance with Impartial Conduct Standards such as;

  • Acting with care, skill and prudence in assessing your client’s needs, risk tolerance and time horizon
  • Putting your client’s interest first – ahead of your own
  • Getting paid reasonable compensation
  • Disclosing material conflicts of interest
  • Making no misleading statements

Full Compliance of the disclosures, supervision policies and procedures, and executing Best Interest Contracts may also be delayed, however for now they remain applicable for Jan. 1, 2018.

Read the release issued by the Department of Labor

Read the Presidential Memorandum issued February 3, 2017

 

Need an action plan for implementing the DOL Fiduciary Rule change? Visit our Resource Guides for information

DOL Fiduciary Rule Changes

DOL Rule Action Plan for BDs & RIAs

Broker-Dealers and Registered Investment Advisor firms are concerned about the new DOL Fiduciary Rule change, leaving many firms uncertain where to begin and when to start.

As any experienced compliance officer can tell you, planning ahead will be key in making a smooth transition to the new standard.  We firmly suggest planning ahead by preparing your staff and stakeholders as well as third party service providers.  Client accounts will need to be analyzed to determine how they will be impacted by the change, if at all. New marketing materials and disclosure forms will need to be developed. Suffice it to say, it is a lot of work. 

RND Resources is here to assist you all the way. Read our action plan for tips and ideas on how to handle important steps in making the transition to DOL Fiduciary standards. Read more

Download the DOL Fiduciary Rule guide

2016 DOL Fiduciary Rule Confusion

2016 DOL Fiduciary Rule change sparks lawsuits and confusion among industry firms and advisors

Download the DOL Fiduciary Rule guide

Guide to 2016 Fiduciary Rule

Since the adoption of the Fiduciary rule change in April 2016, BDs and RIAs are scrambling to understand how it will affect them, what to change, how to implement it, and whether or not the stemming lawsuits will prevail. Many compliance officers are confused by the new standard taking place and even further concerned about making changes that will later be reversed if the rule itself is reversed.

Firms cannot count on the flurry of lawsuits to stop this bit of legislation. However they may result in a few changes or further clarifying language. 

What are the Fiduciary rule lawsuits all about?

Read more