From the October 2017 issue of Investment Advisor • Subscribe!

The Long-Awaited Fiduciary Rule Delay

The DOL has hinted that additional revisions may be on the horizon

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Hurry up and get ready, slow down, stop — I am truly hopeful that this will be my last DOL rule column for quite some time.

The Office of Management and Budget's recent approval of the delay of the Department of Labor's fiduciary rule may come with some added avenues for compliance with the rule. Regardless, those advisors who faced the enduring burdens of compliance with some of the rule's more challenging components (i.e., soft-dollar arrangements, different advisory fees for equity versus fixed income management, and the use of solicitors), can breathe a little easier, for now. Although I am hopeful that smarter people will take a look at this awful rule and make material changes (or, at the very least, provide corresponding “plain English” implementation guidelines), don't hold your breath — after all, it is government.

(Related: SEC ‘Pushing’ for Fiduciary Rule, Clayton Says)

The rule entered its transition period on June 9, meaning the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 and the related acts that constitute fiduciary advice were changed as of that date. The rule's transition period also supplied a number of technical requirements for compliance with the rule, including adherence to the Impartial Conduct Standards and written acknowledgment of a firm's status as a fiduciary. These requirements will remain in place until the rule's new full effective date, which is now presumed to be July 2019, barring further changes.

However, there are hints of even greater revisions to the rule and its compliance requirements on the horizon. The DOL's rule delay release stated that the agency was “particularly concerned that, without a delay in the applicability dates, regulated parties may incur undue expense to comply with conditions or requirements that it ultimately determines to revise or repeal.”

Such changes have already manifested in the DOL's decision not to pursue enforcement actions against regulated firms “if the sole failure of the fiduciary to comply with either the [Best Interest Contract] Exemption or the Principal Transactions Exemption is a failure to comply with the Arbitration Limitation in Section II(f)(2) and/or Section II(g)(5) of the exemptions.” This shift in policy effectively permits advisors to disallow class-action suits in their contracts, a drastic change of course from the rule's original substance.

Unfortunately, the DOL has not unveiled any specifics as to further revisions, but it did state that it “anticipates it will propose in the near future a new and more streamlined class exemption built in large part on recent innovations in the financial services industry.”

While we wait for the DOL to further expand on that thought, it is important to note that, as stated above, the “fiduciary” definition has already changed. Therefore, all fiduciary advice provided, including recommendations to rollover retirement assets, are subject to the fiduciary standard.

As such, in the event a recommendation is made that is not in the client's best interest, or proper disclosures are not made, enforcement actions could be brought against the subject firm. Therefore, despite the delay, it is highly recommended for all firms to:

  • Adhere to the Impartial Conduct Standards

  • Make all relevant disclosures for conflicts of interest

  • Designate a person responsible for monitoring adherence to the Impartial Conduct Standards and for addressing conflicts of interest

  • Acknowledge fiduciary status in writing

  • Perform and document a best interest analysis for all rollovers recommended by the firm

This is surely a more palatable list of compliance requirements, at least for the time being. As a result, advisors can sleep a little easier knowing that the transition period rules will likely remain the rule's only strict compliance requirements until July 2019, and that more help may ultimately be on the way from the DOL.

--- Read DOL Fiduciary Rule Delay All but Certain as Comment Period Closes on ThinkAdvisor.

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