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DOL conflict of interest rule front and center — what now?
Skip Schweiss, 05/08/2017
Managing Director, Retirement Plan Services & Advisor Advocacy
Two weeks after being sworn into office, President Trump issued an executive order instructing the Department of Labor (DOL) to take a fresh look at its Conflict of Interest Rule (the Rule).
Elections have consequences, someone once said. Two weeks after being sworn into office, President Trump issued an executive order instructing the Department of Labor (DOL) to take a fresh look at its Conflict of Interest Rule (the Rule). DOL was asked to consider whether it:
|1.||Has harmed investors’ access to advice on retirement savings offerings|
|2.||Has resulted in disruptions to the financial services industry that may adversely impact retirement investors|
|3.||Is likely to increase litigation and, thus, costs to retirement investors.|
I find it a bit puzzling that the first two questions are look-backs, i.e., whether the rule “has” caused these disruptions, since the Rule had not yet become applicable when the executive order was issued. At any rate, following the April 17th close of the comment period, the DOL is now at work seeking answers to those questions.
The order goes on to say that should the DOL find that the answer to any of these questions is affirmative, the agency should publish a proposed rule “rescinding or revising” the Rule.
So what comes next?
In order to give it more time to complete the work directed by the President, on April 7th — the Friday before the Monday the Rule was to have taken effect — the DOL issued a delay its provisions. We have a new compliance date of June 9th 2017, right around the corner. Starting on that date, two changes happen. One, we will have a new, significantly-expanded definition of a fiduciary for retirement accounts. You will be a fiduciary under the Rule if you:
|1.||give investment advice;|
|2.||to a retirement investor;|
And the Rule changes the definition of “investment advice” as well. A full discussion is beyond the scope of this post, but “investment advice” could be a one-time “recommendation” or even a “suggestion” to a retirement investor relating to investment selection, management or even account type. Secondly, fiduciaries must abide by the “Impartial Conduct Standards” under the Rule, which entails:
|1.||Giving advice that is in the client’s best interest, regardless of your compensation (or that of your firm)|
|2.||Charging only reasonable compensation|
|3.||Making no materially misleading statements|
The DOL said “there is fairly widespread agreement” about the Impartial Conduct Standards, so elected to apply those starting on June 9th. After all, the brokerage industry has been saying for years that it supports a fiduciary standard. The DOL is basically saying, “Glad we all agree on that. Here it is.” And it notes that given the economic analysis showing the benefits of this rule to investors, the June 9th date is likely to stick. So it would be wise to plan to be ready to comply with those provisions by that date.
So what comes after that?
As of now, other requirements of the Rule have been pushed back to January 1st, 2018. Those include written acknowledgement of fiduciary status and various disclosures and other components of the Best Interest Contract Exemption. The “BICE” may be used by financial institutions seeking to offer recommendations in return for variable compensation including commissions, 12b-1 fees, various other revenue-sharing arrangements, and other variable compensation methods… And remember, BICE is explicitly not available for discretionary recommendations under the Rule.
So what’s the forecast?
Partly cloudy, for sure. The DOL has signaled that while the June 9th requirements and date are likely to stick, the January 1st requirements and date are less certain. So we’ve got a few months to continue reading the tea leaves, and to weigh in on policy. Toward that end, I’d love to hear your thoughts so we can form those into a set of messaging that we can deliver to policy-makers at the right time.
I’ll be on Capitol Hill later this month as part of the Financial Planning Association’s annual Advocacy Day, and again in June for the Investment Adviser Association’s annual Lobbying Day. We’ll be engaged in conversation with policy-makers on this critical topic, I’m sure.
I hope this finds you doing well both professionally and personally, and perhaps looking forward to your summer escape.
Content provided is for educational purposes only and is not intended to be advice for any firm.
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