Will DOL Fiduciary Rule Be Watered Down?

Full compliance is not required until Jan. 1, but that could change as a result of a review of the rule currently underway at DOL

Jon Stein, the founder and CEO of Betterment. Jon Stein, the founder and CEO of Betterment.

Almost seven years after the Labor Department proposed a rule to limit the conflicts of interest for financial advisors working with retirement accounts, its fiduciary rule for those advisors is finally set to take effect, on Friday, June 9, following a two-month delay by the new administration. More specifically, June 9 marks the first implementation of the rule; final compliance is not due until Jan. 1, but that date, too, could change.

A Request for Information (RFI) from the Labor Department is expected to seek comment on whether another postponement is needed beyond the January full compliance date and whether further exemptive relief for financial firms is in order.

(Related: DOL Looking for Reason to Delay Full Fiduciary Compliance Date: Lawyer)

Labor is also reviewing issues that were raised in a February presidential memo and these, too, could be included in the RFI: whether the fiduciary rule reduces access to certain retirement offerings, disrupts the retirement advice industry in a way that may adversely affect investors or retirees or is likely to increase litigation and the prices investors pay to access retirement services.

Earlier this week, Labor Secretary R. Alexander Acosta told a Congressional committee that the Labor Department under the Obama administration did not adequately consider concerns about limiting investors’ options in their retirement accounts when developing the fiduciary rule.

On Thursday, the House passed the Financial Choice Act, which along with replacing the Dodd-Frank Act would overturn the fiduciary rule. That bill isn't expected to survive the Senate, where it would need some Democratic support to pass.

Also on Thursday, House Republicans introduced the Affordable Retirement Advice for Savers Act, which would repeal the fiduciary rule, and GOP senators introduced a companion bill.

Efforts to change or undo the fiduciary rule worry Jon Stein, the founder and CEO of Betterment, the digital financial advisory firm. If Labor's review of the rule “leads to a rollback of the previsions going into effect tomorrow, the positive progress represented by the fiduciary rule will be lost,” said Stein in a statement.

He’s especially concerned about the primary enforcement mechanism for the rule, known as the Best Interest Contract (BIC) exemption.

“If – as an industry – brokers, fund companies, banks and financial advisors are all going to be called retirement fiduciaries under the new rule, then we should have well-enforced provisions for making sure fiduciaries act as fiduciaries,” said Stein in the statement. “A fiduciary rule without the BIC would result in an empty and unenforceable legal standard.”  

Under the rule, advisors cannot earn commissions and other forms of conflicted compensation for products sold to retirement accounts if they don’t file a BIC. The contract is a commitment that the advisor is working as a fiduciary for that account, acting in the best interest of the client, earning a reasonable compensation and providing disclosure about the products and compensation. If an advisor violates that commitment, an investor can sue the firm as part of a class action suit.

When the fiduciary rule takes effect Friday, however, there is no requirement for BIC filings. That’s delayed until Jan. 1, which, says Stein, may mean the rule has “limited effect on how many financial firms actually behave.” There is also no requirement that advisory firms designate a BIC compliance office or officers, until January, though firms could adopt recordkeeping and monitoring procedures before then.

What is required beginning Friday, June 9, is that advisors abide by the impartial conduct standard, that they act in the best interest of the clients, receive reasonable compensation and not make misleading statements to clients, according to Marcia Wagner of the Wagner Law Group.

When – and if – the BIC will be required, Ryan Parker, CEO of Edelman Financial Services, which supports the DOL fiduciary rule, suggests that it be written in “plain English that’s clear and concise and not open to the interpretation of 500 different corporate counsel. Investors need more simplicity about what their advisor will or will not do.”

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