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March 16, 2017 at 07:02 AM
The Department of Labor has proposed to extend the “applicability date” of the fiduciary rule. Since it is almost certain that the delay will become final and that, during that extended period, the DOL will find that the Rule limits access by IRA and retirement plan investors to advice and/or increases the cost of advice, it is a safe bet that the DOL will then propose to modify or kill the rule.
That raises the question: What rules will ultimately apply when the dust settles a year or two from now?
The second question is hard to answer, simply because it is difficult to predict the future with a high degree of confidence. But, here are some thoughts. First, either the DOL will work to develop a new regulation or Congress will pass legislation either to adopt a definition of fiduciary advice or to direct the SEC to do that.
Regardless of the process, there seems to be three core principles emerging for a new fiduciary definition. Those are: a duty of loyalty to the investor; a duty to prudently determine which investments and strategies to recommend; and a requirement that advisory compensation be reasonable. In many ways, that is similar to the delayed Fiduciary Rule. However, there will also be major differences. For example, a modified rule will almost certainly eliminate the requirement in the Best Interest Contract Exemption (BICE) that class action lawsuits be permitted. Also, the most burdensome restrictions on advisor compensation will likely be eliminated.
That includes, for example, the requirement that compensation for a particular type of investment (e.g., variable annuities) must be the same regardless of which provider’s product is sold. This would permit, for example, compensation arrangements that make different payments at different times (that is, different levels of front-end commissions versus trails), which wouldn’t be allowed under the delayed Fiduciary Rule. But, regardless of the form or timing of the payments, the total compensation would have to be reasonable.
