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The DOL Fiduciary Rule: 3 Key Issues

Posted by BSMG on 30 Mar 2017

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Breaking news came from the Department of Labor (DOL) yesterday, as they sent the final Fiduciary Rule to the Office of Management and Budget (OMB), requesting a 60-day delay. The Rule has not been published in a Unified Agenda and is pending regulatory review. All eyes are on the OMB right now as the effective date of the Fiduciary Rule grows closer to the applicability date set for April 10th.  

To fully understand the current position of the Fiduciary Rule we discuss it with President and CEO of Brokers' Service Marketing Group, Jason Lea. Jason provides an insight into how the Rule came to fruition, the key issues within it and the reasoning around the delay.

Prior to the recent events of the Trump Administration,  the Obama Administration implemented the Rule through the DOL, in an effort to protect consumers from unscrupulous advisors. When the Fiduciary Rule was announced on April 6th, 2016, many professionals in the financial industry criticized it for broadly portraying advisors and life insurance brokers as deceptive and self-interested. 

Now, with the Trump Administration in the White House, there has been a considerable amount of speculation around his Executive Order released on February 3rd titled, "Presidential Executive Core Principles for Regulating the United States Financial System." That same day, Trump also released a Presidential Memorandum on the Fiduciary Rule that asked the DOL “To examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” 

Some of the thinking around why President Trump issued a memo rather than an executive order to the DOL, points to a de-escalation strategy by the Trump administration to minimize any potential political fallout and reduce the chance of a retaliation. 

Either way, the Trump Administration has recommended that the DOL take some sort of action to review the Rule. The DOL answered back on March 3rd, announcing a recommended 60-day delay to re-evaluate the Rule. The delay has yet to be into effect, but will likely become official in the next few weeks. This has caused much confusion to industry stakeholders who don't know whether to implement their DOL Fiduciary Rule compliance policies or wait for the official delay. On March 10th, the DOL issued a Field Assistance Bulletin, saying it will not enforce the Rule on April 10th, even if the 60-day delay has not been finalized. This has provided the industry some clarity and now most firms are waiting to implement their policies.

Read More: March 3rd: DOL Proposes 60 Day Delay to Fiduciary Ruling
Read More: March 10th: DOL Releases Field Assistance Bulletin

1. Regulations on Qualified Versus Non-Qualified

The DOL Fiduciary Rule only applies to qualified funds, not non-qualified funds. Why should after-tax (NQ) dollars receive different treatment than qualified money? They shouldn't. Clearly, in a Fiduciary Standard, all money deserves the same standard of care.

For More: [Video Blog] DOL Ruling Recorded Webinar

2. Lack of an Appropriate Enforcement Mechanism

There is no regulatory or disciplinary enforcement mechanism to uphold the Fiduciary Rule. The Department's mission is "To foster, promote and develop the welfare of the wage earners, job seekers, and retirees of the US; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights. Protect employee rights, not regulate financial services." However, they completely lack the man power to regulate the entire financial services industry, find wrong doers and cite them. In order to be able to enforce the Rule, the department would have to dramatically increase in size. The problem is the funds aren't available to grow to the size that's needed to appropriately handle this capacity. The regulation of the financial services industry should stay at the Federal level with the SEC and FINRA.

 

How does the DOL enforce the rule?

In order to receive commissions on qualified funds transactions, advisors need an exemption to the rule. Enter the Best Interest Contract Exemption (BICE). Clients and firms must sign a BICE, pledging and acknowledging that the advisor will receive "reasonable" compensation, although the Rule gave no specific amount or range. Since there is no tool for the DOL to use to verify wrongdoing, it's left to the client's discretion. If a client feels misserved or that the advisor didn't have their best interest in mind the client can bring legal action against the advisor. Law360 summarizes this point, "If an adviser breaches his fiduciary duty under the DOL’s proposed rule, the DOL can bring an enforcement action against the adviser; the IRS can impose penalizing taxes on the adviser; and customers can bring a private cause of action against the adviser."

"This Rule basically offers the threat of class action litigation as the enforcement mechanism."

3. Waiting for a Response from the DOL

The DOL proposed 60-day delay to the Rule will give more time to iron out the issues and details. This also provides newly appointed Department of Labor Secretary Alexander Acosta time to review the Rule.

We believe that this 60-day delay will be followed by a longer delay, once the DOL has had time to assess the complexity of the rule and it's implications. This longer delay will likely be announced sometime during the initial 60-day delay. If the Fiduciary Rule is delayed long enough, there is a chance that the SEC or Financial Industry Regulatory Authority (FINRA) could present their own policies. Since these are the traditional authorities in place to regulate financial services, it would likely work out better. Perhaps one where the threat of class action litigation is not the enforcement mechanism.

Regardless of your political affiliation, if you are in the financial services industry you will likely be affected by the fact that we are all marching towards a fiduciary standard for all that we do! The time is coming to welcome a new fiduciary standard and we hope this is a well designed one.

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Learn More: The Post DOL World for Annuities

Topics: Fiduciary, DOL, Financial Advisors, Department of Labor