The Labor Department has given advisors, broker-dealers, fund firms and other industry players 15 days to comment on the Jan. 1 start date for the full introduction of its new fiduciary rule, some aspects of which went into effect June 9.
It also says they have 30 days to comment on all other issues related to the rule.
As feedback rolls in, what should advisors and their firms expect will happen to the fiduciary rule? Look for possible changes to enforcement and perhaps even to the applicability date of regulations in 2018, according to Aron Szapiro, director of policy research for Morningstar.
Under the Trump administration, the Labor Department appears to be assuming it will “largely keep the new definition of a fiduciary and the impartial conduct standards they must follow,” Szapiro, said in an interview with ThinkAdvisor.
In terms of who is and who is (and is not) a fiduciary, for instance, regulators “may tinker with this a bit,” but major changes are not expected, the regulatory specialist explained.
“People giving advice to retirement savers are by and large fiduciaries, whereas before many were not,” he said.
However, Labor is “considering adjustments to the enforcement mechanism,” Szapiro says.
Regulators are looking at whether or not they should let advisors with “levelized compensation” for their retirement services follow a procedure closer to a “light” version of the best interest contract exemption, rather than the full BICE — “although there is room to shape the details of the final regulation,” Szapiro explained.
Adequately disclosing material conflicts of interest and not charging more than is reasonable will continue to be emphasized, he says.
However, there seems to be room for debate on “what the enforcement mechanism will look like and for whom” it will apply, he explains.
With the Obama administration, the main way to streamlined regulatory compliance was by charging a level fee.
Today, the approach is similar in some respects, “but not with the exact same standard,” the Morningstar policy director explains.
In other words, it looks like regulators “are exploring whether to create another way [for advisors] to comply — in a streamlined way to take advantage of new market innovations, especially ‘clean’ share classes,” Szapiro said.
New Share Classes
The new T or “transactional” shares, which have a lower front-load fee than A shares — up to 2.5% vs. 5%, for instance — are “pretty attractive as a temporary solution,” he says. “Over the long term, though, clean shares make more sense.”
Clean shares aim to have no upfront charges, nor do they have ongoing 12b-1 fees for fund services or other inducements to sell one fund over another.
The regulators “have a number of questions around creating an alternative, and less burdensome, compliance mechanism for firms that use ‘clean’ and possibly T shares,” the Morningstar regulatory-affairs specialist explained.
“Additionally, I would not be surprised by a further delay past Jan. 1, 2018 [for] the full rule,” he added.
“This makes some sense because were to DOL to create a new way to comply, the department and firms would need time to create, and develop systems to comply with, the rule respectively,” the regulatory specialist said.