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Regulation and Compliance > Federal Regulation > DOL

Hoping for a Regulatory Miracle

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Dear Santa:

It’s probably too late, but I would love some common sense to be exercised in 2017. If you have any clout with our government, you could do a lot of good in this regard.

You see, a bunch of years ago, the Securities and Exchange Commission was charged by statute with creating a universal standard for my business — the securities business — that would require that retail financial advisors act only in the best interest of their clients. I know that it sounds like that should already be true, but it’s not.

It seems beyond obvious to me that financial advisors should not be the only professionals (among doctors, attorneys, architects, accountants and the like) who don’t have to put the interests of their clients first. Unfortunately, Santa, the SEC didn’t do the job it was charged by law to do. Apparently, there’s no penalty for that when you’re part of the government.

When the SEC sat on its hands, the Department of Labor decided to get involved. The DOL didn’t (and doesn’t) have authority over the whole industry; that’s the SEC’s job. But it arguably (although not clearly) has authority over retirement savings in general.

So, with respect to retirement savings, the DOL proposed a regulatory rule whereby advisors would have to act in their clients’ best interest when they are giving advice and acting on that advice with respect to retirement assets. This proposal was supported by pretty much every consumer group (again, the idea that financial advisors shouldn’t have to act in their clients’ best interest is silly).

But my industry generally screamed bloody murder and opposed it at every turn. The major exception was that part of the business that already acted exclusively as fiduciaries — those who did not ever act as part of a broker-dealer but acted entirely within the structure of a Registered Investment Adviser. The RIA-only world generally supported the proposal, which made sense to me, but didn’t care about or comment upon its inherent flaws, because those flaws pretty much pertained only to the BD world.

Those inherent flaws may explain a bit of the opposition to the DOL rule. For example, the new rule provides that there are wholly different and separate requisite standards of conduct dependent upon whether the advisor is dealing with retirement assets or not.

But those flaws don’t explain a lot of the opposition to the rule then and now, I don’t think, though I hope I’m wrong there. You have a better sense than I do as to who is naughty and who is nice, Santa, so I’ll leave that analysis to you.

In any event, that version of the new rule went through the necessary bureaucratic hoops over a lengthy period before the DOL pulled it — largely based upon apparent assurances from the SEC that it would finally do what it was supposed to have done all along.

After another couple years of silence from the SEC, the DOL got involved again and made another rule proposal. It was similar to the first one with some enhancements based upon what had been learned the first time around.

But some of the inherent flaws remained, including the two-tier standard of care. Once again, my industry — or at least the BD world — was largely unilaterally and unequivocally opposed to it.

The necessary bureaucratic process played out, some improvements were made (although not nearly enough), and the DOL rule became effective. As things stand today, the DOL’s fiduciary standard with respect to retirement assets will apply beginning April 10.

To the DOL’s credit, it has been very accommodating with its time during this process. However, the DOL doesn’t understand the securities business. That shouldn’t be surprising given the applicable regulatory scheme (it’s the SEC’s job after all), but that lack of knowledge has had some hugely significant impacts.

In a variety of contexts, the DOL has suggested that it doesn’t think this change to a fiduciary standard for retirement assets is all that big of a deal. And conceptually, it isn’t. It needn’t be a big deal to replace a suitability standard — whereby recommendations must be suitable but not necessarily in a client’s best interest — with a fiduciary standard.

The problem, Santa, is that the DOL, through 1,000-plus pages of regulatory requirements, set up a complex framework that must be followed whenever retirement asset investments are involved. This framework touches every aspect of the BD business and requires a complete overhaul of everything that happens therein: paperwork, systems, technology, operations, oversight and supervision, surveillance, training, compliance and more.

Every BD I’m familiar with has spent enormous amounts of time and money to try to comply with the new rule (which, again, isn’t altogether bad because advisors should be fiduciaries), but almost none of that spending relates directly to client care.

Most of the time and money expended has been used simply trying to put systems in place to meet the DOL’s bureaucratic requirements, not to serve clients. It wasn’t intended, but smaller firms will be at risk in this new environment, because the capital requirements for all the new systems are large indeed.

As a result, clients without much money are going to find it even harder to find competent investment advice. The large firms already have minimum asset requirements that make it really hard for ordinary folks to get competent investment advice from a real person who looks carefully and realistically at their situations, expectations, needs and goals.

Interestingly, the RIA world largely thinks the new rule doesn’t really apply there, because a fiduciary standard is already in place. However, an ERISA fiduciary pursuant to the DOL rule is substantially different than a fiduciary under the current securities law. Moreover, every RIA that manages retirement assets will need to put in place the framework that DOL requires. But I digress.

Finally, the presidential election has thrown another monkey wrench into the mix. Some supporters of the incoming Trump administration have said that the DOL rule will be undone after the president-elect’s inauguration. A delay of some sort is possible too. But nobody in authority has said that. Besides, undoing an already effective regulation isn’t possible with just a signature and a press release.

While it’s unclear what will happen, Santa, I’d simply like common sense to prevail. I’d like the SEC to do its job. I’d like a fiduciary standard of care in place for all retail securities clients.

I’d like the extraordinary efforts being expended to try to comply with the new rule spent on improving the advice clients get and the service they receive rather than on jumping through bureaucratic hoops. I’d like a simple and straight-forward regulatory scheme around this new standard, one that makes practical sense and doesn’t cost a fortune.

Pretty much, I’m asking for a belated Christmas miracle. Will you help me out, Santa, please?


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