From the November 2016 issue of Investment Advisor • Subscribe!

Warning: Don't Expect Revisions or Reversals in DOL Rule

Advisors and broker-dealers should not slow compliance efforts while waiting for impending litigation results and guidance from DOL

Advisors need to be prepared to comply with the DOL's fiduciary rule in April. Advisors need to be prepared to comply with the DOL's fiduciary rule in April.

As the Department of Labor begins to roll out guidance this fall on compliance with its fiduciary rule for retirement accounts, advisors and broker-dealers should not count on major revisions or reversals that will substantially ease compliance with the massive rule.

This advice was offered by attorneys during an October webcast that I conducted for ThinkAdvisor.com.

In the face of the impending litigation against the rule, Labor “will be particularly sensitive to reversing course in any way,” noted Josh Waldbeser, associate at Drinker Biddle & Reath. DOL “will be sensitive to changing the meaning of the regulation” through frequently-asked-questions (FAQs).

[Ed. Note: The DOL released its first round of FAQs on Oct. 27, with more expected in the coming months. ]

As it stands now, six lawsuits have been filed against DOL's rule, with rulings being awaited in Washington and Kansas. Oral arguments in the three cases brought in Texas — which have been consolidated — are set to be heard on Nov. 17.

As the rule's April 10, 2017, compliance date draws closer, advisors and broker-dealers are in various compliance stages, Allison Wielobob, counsel with Sutherland Asbill & Brennan, noted during the webcast. She said that while this should be expected, advisors and broker-dealers shouldn't dawdle.

While rulings have yet to be rendered in the suit brought by the National Association of Fixed Annuities in Washington and the Market Synergy case in Kansas, and with the impending April 10 compliance date, “the courts have been made aware that this [fiduciary rule] is a real-world kind of [regulation], and if we’re going to comply […] we have to get going,” Wielobob said on the webcast.

“The responsible business decision [is to] not slow down efforts to comply with the rule” despite the impending litigation.

It does appear that some advisors are trailing behind. At a fall conference held in Washington by the National Association of Personal Financial Advisors, an advisor shouted out during a presentation on compliance with the rule: “What's the best interest contract exemption?”

The question, while likely on the minds of other attendees, was met with some gasps and sighs from audience members.

Thomas Clark, counsel with The Wagner Law Group, which specializes in ERISA and employee benefits, who conducted that NAPFA session, conceded to the group of fee-only advisors that even after being immersed in the rule since the initial 2010 release, he sometimes feels he has “no familiarity” with it — particularly as further inspection of the final rule reveals new surprises.

A Far-Reaching Rule

DOL's rule is “going to affect everybody in this room,” Clark told the NAPFA attendees, adding that it's hard to discern precisely how each firm will be impacted.

When the final rule was released in April, he continued, “the initial reaction from us was, ‘This is really good for those folks who’ve been doing it right all along — a conflict-free compensation structure.’”

However, “as we’ve digested the rule and applied it to real life [...], we’ve been discovering that's not exactly true. All of you are going to have to be analyzing your business models and business practices very carefully to make sure you don't offend the rule.”

One ground rule for fee-only advisors: “Charging fee-only compensation does not eliminate compliance with the rule,” Clark said. “Anytime DOL deems an action conflicted, you will need an exemption even if you’re charging fee only.”

What's not a conflict? If an existing retirement client or some recipient of financial planning advice “that is already paying you a level fee — you have them before April 10 — if you continue to provide recommendations to them after April 10, under that arrangement, you should be able to consider that DOL will say that's not conflicted and no exemption is needed,” Clark said.

He advised firms to appoint a BIC compliance officer, a sentiment echoed by both Waldbeser and Wielobob.

Waldbeser noted that most of the requirements under the BICE, which he said are “certainly the ones that are the most administratively onerous,” won't take full effect until Jan. 1, 2018, “so we do have a little cushion there.”

BICE, Waldbeser explained, has a “three-stage disclosure regime with a possibility of a fourth — upfront, pre-transaction and the web disclosure — that's all going to have to be developed.” For clients that request them, there's also “the more on-demand disclosure on compensation and fees. That will be an incredible undertaking for broker-dealers.”

The Wires Aren't Waiting

Over the past couple of months, the larger broker-dealers and wirehouses have already been making major changes to their business models and product lineups to comply with the rule. In early October, Merrill Lynch announced that starting in April, it will cease offering new advised, or commission-based, brokerage IRA accounts. Merrill will begin encouraging its retirement clients to consult with their advisor about whether to move their brokerage IRA accounts to Merrill Lynch One, the BD's investment advisory program that offers a single, asset-based fee schedule, if they would like to continue to receive investment advice.

Fred Reish, partner in Drinker Biddle & Reath's employee benefits and executive compensation practice group, chalked up Merrill's decision to the wirehouse wanting to avoid using the BICE.

It's easier to comply with the DOL fiduciary rules through level-fee advisory services, Reish said, adding that “if BICE isn't used, the prospect of class-action lawsuits is diminished.”

What should advisors and broker-dealers be doing now? Wielobob noted that she's advising her BD and advisor clients to take a three-pronged compliance tack: make a business impact assessment, determine which activities and products are subject to the rule, and then develop a compliance plan — which entails managing and overseeing its execution.

Her advisor and broker-dealer clients, she said, are in the first or second stage, with most having entered the second phase. “Your business impact assessment should be done or underway to meet the [April] implementation timeframe,” Wielobob said. Developing the compliance plan is “the bulk of the effort,” she added, noting that it's imperative to make business strategy decisions regarding product offerings, and to develop a distribution strategy, as well as a compensation structure.

--- Read Financial Services Explained, Pt. 1: The Cost of Everything on ThinkAdvisor. 

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