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Regulation and Compliance > Federal Regulation > DOL

DOL’s Hauser Warns BDs to Prep for Fiduciary Deadline; AARP to Deploy ‘Mystery Shoppers’

By Melanie Waddell

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Broker-dealers should be “nervous” if they don’t have policies and procedures in place before the Department of Labor fiduciary rule’s first deadline hits next April, Timothy Hauser, one of the chief architects of the rule, said Tuesday at a Financial Industry Regulatory Authority conference in Washington.

Also on Tuesday afternoon, the Senate passed a resolution to overturn the rule.

Nancy Smith, executive vice president and corporate secretary at AARP, said on a conference panel with Hauser that AARP will not only continue to advocate for the fiduciary rule but plans to assemble some members to act as “mystery shoppers” to see if advisors are complying.

The retirement advice “problem is not just a few bad actors,” Smith said. “All financial professionals can face enormous institutional and peer pressure to act in a way that’s not in the client’s best interest.”

AARP, she added, is “also looking forward to fees going down and people having more money in their nest eggs.”

DOL has been fielding “a lot of questions” about what an acceptable set of policies and procedures would entail “if a firm is going to receive variable compensation for certain investments,” as well as what types of compensation structures “can be imposed between the firm and advisor” to satisfy the rule, said Hauser, deputy assistant secretary for program operations at the DOL’s Employee Benefits Security Administration.

“People are still working through the operational issues,” Hauser said. While he reiterated the fact that DOL “wants more back and forth” between industry and DOL before issuing further guidance, he said he expects DOL to issue guidance on policies and procedures that need to be in place. He urged attendees to “come talk” to DOL or send queries to him.

“This [rule] was a major undertaking for us and will be a major undertaking for you,” so reach out, Hauser said. “We will continue to talk to the [Securities and Exchange Commission] and FINRA; we have benefited from those conversations.”

Bottom line, though, he said, on what qualifies as fiduciary advice under the rule: “There has to be a recommendation; you have to get a fee for it.”

Bruce Maisel, chief compliance officer of Western & Southern Financial Group, noted on the panel with Hauser and Smith that under DOL’s rule, there “can’t [be] differing compensation for the advisor on the product side. Within a product type, [it will be] quite a task to justify a different fee as it is today.”

Richard Matta, principal at Groom Law Group, agreed on the panel that DOL’s rule will have “significant effects” on mutual funds. “On the FA level, the [best interest contract exemption] requirement will require [fee] levelization; in mutual funds it will be hard to charge differential comp — between annuities you might be able to, but in funds and ETFs those differences are going to disappear.”

As to the Senate resolution, the Securities Industry and Financial Markets Association along with the U.S. Chamber of Commerce, the Financial Services Institute and five other trade groups sent a letter to Senate leaders Monday urging them to pass it. The House has passed a similar resolution. Any measure to kill the rule that makes it to President Barack Obama’s desk will likely be vetoed.

Senate Finance Committee Chair Orrin Hatch, R-Utah, argued against DOL’s rule and for passing the resolution on the Senate floor Tuesday, stating that DOL’s rule “is an attempt to rewrite ERISA prohibited transaction regulations for IRAs that have been in place since 1975. However, the prohibited transaction rules for IRAs are codified in the Internal Revenue Code, which, generally speaking, would give Treasury regulatory jurisdiction over the matter.”

Hatch reiterated the fact that he has drafted legislation that would “restore Treasury’s rulemaking authority in this area in order to ensure that the proper expertise is brought to bear on these issues and that future rules governing financial advice and marketing are, at the very least, crafted with the broader financial regulatory framework in mind.”

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