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DOL Rule Takes A Stumbling Journey Through 2017

The political winds shifted abruptly during the early morning hours of Nov. 9, 2016, when Donald J. Trump declared victory over Hillary Clinton.

In the world of financial services, the winds of change were very positive throughout 2017. Barack Obama-led regulations were reversed, or stymied, and Trump appointees worked tirelessly to enact a broad, pro-business agenda.

By far, the controversial Department of Labor fiduciary rule was, and remains, the biggest item on the minds of distributers and producers. The fiduciary rule began taking effect June 9 with the impartial conduct standards requiring advisors and agents to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation.

Phase two of the rule is expected to be delayed until July 1, 2019.

Phase two deals with exemptions that regulate the sale of annuities sold with retirement funds — in particular, the Best Interest Contract Exemption, which requires a financial institution to accept liability for each contract and gives clients the right to sue over investment advice.

While the fiduciary rule timeline seems somewhat normal on paper, in reality it has been anything but, said Andrea McGrew, chief compliance officer for USA Financial, based in Ada, Mich.

“Because the political climate is so divisive right now, I feel like nothing is really going the way it would go with a president who has full support,” she said. “It’s brought more of a Wild West feel to this process than would have ordinarily been there.”

Stutter Steps

USA Financial is a broad-based financial services firm with a broker-dealer and a registered investment advisor force. Like many competitors, the company struggled with its response to the ever-changing fiduciary rule, McGrew said.

“There were lots and lots of rabbit holes that this rule went down, with unintended consequences,” she said.

The cost of complying with the fiduciary regulation is pegged at $2 billion to $3 billion by the DOL. But the Securities Industry and Financial Markets Association, a Wall Street trade group, said its studies put the number at closer to $4.7 billion.

USA Financial certainly saw expenditures rise, McGrew said.

“It was an expensive year,” she said. “We put a lot of money into technology. We put a lot of money into procedures — a lot of manpower and time.”

The DOL rule is creating problems that financial services are already dealing with, executives say. The most obvious, and predicted from the start, is the potential declining access to financial advice to smaller accounts.

USA Financial is not dropping accounts, but other firms are, according to an Insured Retirement Institute comment letter to the DOL.

“In a July 2017 survey of IRI members, a number of IRI distributor members reported that approximately 155,000 of their clients have already been orphaned, with far more accounts expected to be impacted as implementation of the rule proceeds,” according to the comment.

The awkward delineation of qualified and nonqualified accounts continues to be an issue. Of course, DOL can only regulate qualified money, per the Employee Retirement Investment Security Act of 1974.

Still, it is an issue, McGrew said.

“This bifurcated standard that we have, or could potentially have, is really, really clunky, especially for a firm like ours, where we work in both spaces — qualified and nonqualified,” she explained. “It makes it really, really difficult because how are you going to say to a nonqualified account ‘Well, we treat your assets differently?’”

Once the rule is fully in place, USA Financial will treat all accounts the same, McGrew said.

More Cooks in the Kitchen

While the Trump victory was a clear sign to financial services that the DOL rule was not going to survive, the road to change was a bumpy one that left many firms in an uncomfortable limbo.

Problems came quickly after inauguration. Trump’s nominee for secretary of labor, Andrew Puzder, twisted in the wind for weeks while damaging personal information leaked.

By the time it was revealed that Puzder had once employed an undocumented housekeeper and he withdrew his nomination, valuable weeks were lost. Alexander Acosta was quickly nominated and confirmed, but it was already late April.

“The amount of indecision and/or ambiguity around the rule was exacerbated by the lack of leadership at the DOL for a while,” said Brendan McGarry, an attorney specializing in financial services issues for Kaufman Dolowich & Voluck. “Industry participants were left waiting for specific guidance.”

While Trump delayed the fiduciary rule implementation for 60 days until June 9, Acosta said he could find no legal basis to prevent the impartial conduct standards from taking effect.

From there, he zeroed in on delaying the second phase of the rule.

In the meantime, the delay created a void that state regulators and the Securities and Exchange Commission rushed to fill.

Several states are pursuing fiduciary style regulations, with Nevada being the first to put such a law on the books. This push makes financial services execs nervous.

“From my perspective, as a compliance officer, it is really challenging when you work in virtually every single state to then have to maintain, review and comply with 50 different standards,” McGrew said.

SEC efforts, on the other hand, are welcomed by an industry that sees better potential for a consistent and workable standard. Chairman Jay Clayton has refused to put a timetable on when the agency might complete its fiduciary standard.

It all contributed to a big year of uncertainty swirling around the fiduciary rule. And that doesn’t appear to be changing anytime soon.

“We’re in a holding pattern. We’re just waiting to see,” McGrew said. “We put in place procedures and processes in order to make sure that we’re complying with the current state of the rule.” 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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