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Regulation and Compliance > Federal Regulation

DOL Fiduciary Rule's Fate: 3 Possible Scenarios

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President-elect Trump campaigned on, among other things, a significant reduction in federal regulations. His election also raised the specter of overturning the Department of Labor fiduciary regulation and the related exemptions. However, we haven’t heard anything specific about the incoming administration’s plans for the regulation.

As a result, there are several alternative outcomes, all of which affect advisors to a greater or lesser extent. This article examines some of those alternatives.

1. Nothing Changes
So far, while some people who appear to be close to Trump have asserted that the rule will be withdrawn, the president-elect has not spoken out on the issue. Instead, the focus has been on more significant matters, such as tax reform, free trade, jobs, the war in the Middle East, immigration and so on. In the grand scheme of things, those issues are more important to more people than the fiduciary rule.

Is it possible that April 10 can come and go without any changes? That is, that the rule could become applicable on April 10, as currently scheduled?

Yes. There are so many major issues on the desk of the incoming president that there is a distinct possibility that the fiduciary rule will not be a focus of the incoming administration. In that case, the rule will become applicable on April 10.

If it does, advisors need to be prepared.

For RIAs and their representatives, the primary activity that will be impacted by the new rules is the recommendation of plan distributions and rollovers. The fiduciary regulation and exemptions impose a heavy compliance burden on advisors who make those recommendations. As a result, it would be difficult to come into compliance in a short period of time. RIAs should focus on a solution for that issue.

Also, RIAs should examine their practices for investment advice to IRAs. Our experience has been that some RIAs are inadvertently, and unknowingly, violating the prohibited transaction rules for IRAs.

For broker-dealers and their representatives, compliance with the rollover rules is similarly burdensome, but more generally, their compliance issues are more complex, expensive and time-consuming. As a result, virtually all of our broker-dealer clients are continuing to work as if the rule will be applicable on April 10.

2. The Regulation Is Withdrawn
In this case, much of the work will have been for naught. However, we are seeing fundamental changes as a result of the rule that will not be reversed. For example, some broker-dealers have decided to move more of their business to a fiduciary advice model and will keep parts of their business in that model even if the rule is withdrawn. On the other hand, other broker-dealers will revert to a sales-and-commission model. However, the withdrawal of the regulation will not materially impact RIAs (other than for the recommendations of rollovers, but see below).

In fact, it’s possible that the withdrawal could be beneficial to the RIA model, in the same way that it has been for 401(k) plans. Let me explain that.

Over the years, more and more 401(k) plans have shifted to advisors who work in the RIA model because of its transparency, the focus on advice, and the avoidance of conflicts of interest. Part of that change was attributable to RIAs marketing themselves as fiduciary advisors. It’s possible that, going forward, RIAs will market their IRA services as fiduciaries, pointing out that non-fiduciary advisors have a lower standard of care (the suitability standard) and have conflicts in how they are compensated for selling certain products over others.

In both cases, though, recommendations about rollovers will continue to be a focus of regulatory attention. As the baby-boomer demographic continues to retire, more and more money will be rolled out of plans and greater attention will be paid to conflicts of interest, high fees and quality of advice.

There are already two other pieces of guidance on rollovers (DOL Advisory Opinion 2005-23A and FINRA Regulatory Notice 13-45). It seems almost certain that we will see an uptick in FINRA and SEC guidance and examinations about recommendations to take distributions from plans and roll over to IRAs.

In addition, it is highly probable that there will be a greater focus on advice to IRAs, including conflicts of interest, disclosure of fees and costs, unreasonably high compensation, and so on.

3. Delay and Modification of the Regulation and Exemptions

Perhaps the most likely outcome is that the applicability date of the regulation and exemptions could be delayed.

Rumors are circulating that the application of the rules might be delayed for a year and modified during that period. It’s almost impossible to tell if the rules will be watered down in material ways, or if they will instead be modified to reduce some of the more burdensome and expensive requirements. If it is the latter, the rule will stay substantially the same, but the Best Interest Contract Exemption would be modified materially. For example, the class action provision might be removed and the stringent governance of advisor compensation might be modified—or perhaps even limited to simply require that it be reasonable (as opposed to level and neutral).

If the rule is materially watered down, the outcome might be that all advisors could represent that they are fiduciaries, but with a lower standard of care, similar to the suitability standard. In that case, the compliance requirements for the exemptions would probably also be significantly reduced; the most likely outcome would be disclosure-based exemptions.

On the other hand, if the standard of care remains substantially the same, but the exemptions are simplified, the standard of care would be heightened, but the cost and complexity of compliance would be reduced.

Those are the primary alternatives. At this point, it’s “wait-and-see.” While it’s always dangerous to make predictions, I believe that the most likely outcome will be that the rules are delayed and modified slightly.

I don’t think that the fiduciary standard of care for IRAs and rollovers is going to be withdrawn. But, to paraphrase Yogi Berra, it’s hard to make predictions, particularly when they are about the future. 

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