The DOL Fiduciary Rule, effective April 2017, is among the items that the new administration may put on hold upon taking office in January 2017. Once effective, the Rule makes all financial advisers providing rollover and other advice to retirement investors “fiduciaries” required to put retail customers’ interests before the advisers’ interests in getting compensated. Broker-dealers, investment advisers, and mutual fund complexes have already sunk millions of dollars into upgrading and changing their compliance and business models in anticipation of the Rule.
At the center of the Rule is the so-called “Best Interest Contract” Exemption or BIC. It permits fiduciaries to enter into prohibited transactions (e.g., accepting commissions in connection with providing rollover and other investment advice) if the financial firm and professional enter into a BIC with the customer, provide certain disclosures, adhere to Impartial Standards of Conduct, charge only “reasonable” compensation, and acknowledge fiduciary status.
Due to its complexity and related compliance costs, some firms have announced that they will not be opening new commissions-based retirement accounts. Others have said that they will continue to open such accounts but will make continuous efforts to review accounts for the appropriateness of commission-based versus fee-based compensation based on a number of factors (e.g., the amount of trading in the account).
The new administration may ask the SEC to step in and issue a unifying rule covering investment advice to retirement accounts. Currently, the SEC’s regime for registered investment advisers under the 1940 Investment Advisers Act provides that investment advisers (who typically charge a percentage of assets under management) are fiduciaries. Such advisers may enter into conflicted transactions if adequate disclosures are made to the customers and if not otherwise prohibited by law.
By contrast, SEC Rules do not impose a fiduciary duty on brokers who provide rollover and other advice to retirement accounts in return for a commission. Brokers charging a commission for transactions are not considered fiduciaries and are instead held to the lesser “suitability” standard.
Regardless of whether the DOL Rule survives, the kinds of changes and industry introspection that have occurred are probably not a complete waste of time and money. FINRA and the SEC are already monitoring investment advisers and broker-dealers for conflicted transactions and policies with respect to compensation. For example, FINRA tends to take a very broad view of whether an investment recommendation, including a rollover recommendation, is “suitable”. Further, the plaintiffs’ litigation bar has long been asserting claims for breach of fiduciary duty in FINRA arbitrations even in the technical absence of such a duty.
Bottom line: regardless of the durability of the DOL Rule, advisers and their firms should continue evaluating their business practices to conform to a “best interests” standard.
For further discussion, here is a recent article from The Hill: