Nothing has changed, for the moment

Nothing has changed, for the moment

Skip Schweiss | February 17, 2017

Recent news from the White House about the Department of Labor (DOL) Conflict of Interest Rule (the Rule) have resulted in confusion for investors and industry insiders alike.

Recent news from the White House about the Department of Labor (DOL) Conflict of Interest Rule (the Rule) have resulted in confusion for investors and industry insiders alike.

On February 3, 2017 media outlets reported that President Trump was issuing a memo that would include a 180-day delay of the Rule – but that reporting was based on a “draft” that turned out to be substantially different from the final version signed by the President. The final Presidential memo, (which did not include a delay), asked the DOL to determine whether the Rule is likely to harm investors, cause disruptions in the industry or cause an increase in litigation and, if so, to propose a new rule “rescinding or revising” the original.

On February 9, 2017 the Office of Management and Budget (OMB) received a proposed rule from the DOL to delay the Rule currently scheduled to become applicable on April 10, 2017. If the proposal is approved after review by OMB and published in the Federal Register, expect a short comment period, and preparation of a final rule by DOL which, if again reviewed, approved and published by OMB might potentially result in a new applicability (compliance) date. However, this process takes time and in the meantime, industry has no choice but to continue to prepare.

Here’s the summary: President Trump has asked the DOL to conduct a review of the Rule and “prepare an updated economic and legal analysis” to assess to what degree it will disrupt the availability of advice to investors and potentially cause an increase in litigation.

The memo said that if the DOL concludes that it does hurt investors or firms, it can propose a rule “rescinding or revising” the regulation.

So, while the DOL has a big task at hand, officially, nothing has changed. There is no timeline associated with this review. While there are a lot of predictions floating around the industry, they are all guesses and speculation. As I’ve been saying, the wisest course is to be prepared.

Regulators offer guidance to advisors . . . and investors

Prior to being tasked with conducting a review of the Rule, the DOL released two sets of FAQs, one geared toward workers and retirement investors, the other geared toward advisors. As of today, the Rule is still set to become applicable on April 10, 2017.

On the non-retirement side, in January, the SEC’s Office of Compliance Inspections and Examinations (OCIE) shed some light on its examination priorities for the year. There are a few newer areas to consider.

The DOL on consumer protections

The DOL released an excellent consumer-focused document on the importance of the Rule in protecting the hard-earned assets of retirement investors. While many have gotten caught up in the complexities of the 1,023-page Rule, the first question of this document distills it into a single sentence: “The Rule defines financial advisers as fiduciaries if they provide you an investment recommendation regarding your retirement account and they get paid.”

Additional highlights that may spur conversations with your retirement clients include:

Question 2: The document states that, “The financial services industry will not be permitted to use incentives such as quotas, bonuses or prizes that encourage advisers to make recommendations that are not in your interest.” It goes on to alert investors that they may have to enter into a “Best Interest Contract” with their financial institution.
Question 19: This should be a particular focus for fiduciary investment advisers: “An investor can always ask an adviser whether the adviser will live by the fiduciary ‘best interest’ standard in the Department of Labor Rule and exemptions for all investments—and if they will not, can consider finding one who does.” Wow, that’s a powerful statement from a financial services regulator! And I surmise it might be useful in helping educate your clients and prospects about the different levels of advice standards.

I urge you to read the complete document, including the Appendix titled, “Questions 401(k) and IRA Investors Should Ask Their Financial Adviser.” If the DOL is encouraging retirement investors to ask you these questions, it’s a good idea to have your answers ready.

Consumer Protections for Retirement Investors—FAQs on Your Rights and Financial Advisors

Helping advisors with compliance

The DOL also released an FAQ document geared toward advisers. It does an excellent job of laying out the definitional boundaries of the Rule right off the bat. Question 1 is only about a page and a half. Well worth a careful read.

Special note for dual registrants who may be advising retirement plan sponsors: Question 7 notes that under the Rule it will still be allowed to receive revenue-sharing payments as long as they are offset against the adviser’s fee, so that the advisor’s fee is still level and not compromised by the recommendations given.

The adviser-focused FAQs shed light on additional technical issues that some have struggled with as they prepare to be in compliance. Here’s the complete document: Conflict of Interest FAQs

SEC exam priorities for 2017

They don’t make an appointment, so it’s always a good idea to be prepared for a visit from SEC examiners. If you’ve never been examined and/or employ individuals with a “track record of misconduct,” be ready. The OCIE has released its 2017 priorities. This year, some areas of focus include:

•  retail investors and “robo-advising”
•  senior investors
•  retirement investments
•  market-wide risks
•  FINRA
•  cybersecurity

Here’s the full SEC press release

National LINC recap

On a personal note, I’ve just returned from a fantastic experience at our National LINC conference in San Diego. We talked a lot about the DOL Rule and potential changes to the regulatory landscape in the coming months.

We also enjoyed hearing from Salim Ismail of ExO Works. As a futurist, Salim made some bold, mind-blowing predictions about what our world will look like in a few short years. Given the uncertainty surrounding the regulations governing our business, we could all use the help of a crystal ball. If I were a “futurist for a day,” I’d predict that a business that truly puts investor interests first is going to succeed—regardless of whether the law requires it.

I hope we can continue the enthusiasm and energy we felt throughout the conference. I promise to keep you informed here with “Advocating for You” and on Twitter. Follow me @Schweiss_TDA