Although the controversial fiduciary rule began taking effect June 9, its final disposition remains very much in doubt.
In fact, the next step is a big one and will come when the government issues its response in a Texas lawsuit.
That response, due by July 3, will serve as the first extensive clues on new Secretary of Labor Alexander Acosta’s strategy for the rule.
The Texas lawsuit is headed by the U.S. Chamber of Commerce and is one of four filed in federal courts nationwide. But the court has not yielded any success and is not expected to in the future.
The real value in the DOL court brief is the hints it will provide on department strategy for the rest of the year.
While the surprise election of President Donald J. Trump did not lead to the quick death of the fiduciary rule, Trump did throw up a very big roadblock. The president, while far more consumed with tax reform, health care and a host of other issues, nonetheless issued a Feb. 3 memorandum ordering the DOL to review the fiduciary rule.
That memo gives Acosta an opening to make substantial changes to the parts of the rule scheduled to take effect Jan. 1, 2018. It’s those parts that the industry hates the most.
In particular, the Best Interest Contract Exemption. It creates a private right of action in the form of a contract signed by client and advisor. There is speculation that the contract provision could be eliminated.
In June 7 comments before the House Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, Acosta signaled a willingness to give rule opponents more deference.
“Concerns were voiced in the original rulemaking process, and the prior administration made a decision that those concerns were outweighed by what the prior administration wanted to do,” Acosta said.
The Office of Management and Budget received a Request For Information from the DOL on June 6. The RFI seeks information from industry players and is the first step in the DOL review, Acosta said.
The DOL rule establishes a fiduciary standard for anyone working with retirement dollars. The DOL under former President Barack Obama claimed commission-based “conflicted advice” costs investors $17 billion annually, a figure widely disputed within the industry.
Trump’s memo ordered the DOL to answer specific questions.
“You are directed to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice,” the memo stated. “As part of this examination, you shall prepare an updated economic and legal analysis.”
Acosta has a full six months ahead to oversee study efforts to answer these questions.
A Harvard Law School graduate, former clerk to Supreme Court Justice Samuel Alito, and a former law school dean, Acosta isn’t likely to endorse a strategy destined to fail legal scrutiny.
The DOL study will put the Obama administration’s analysis under the spotlight. Conflicted advice costs investors $17 billion annually, the Obama DOL concluded, a finding opponents say is deeply flawed.
Consultant Jack Marrion co-authored a 2015 study that concluded the DOL relied on inappropriate or unknown data and failed to acknowledge that financial advisors are already regulated by the states.
However, several federal courts have accepted the DOL studies as legitimate proof of investor harm, underscoring the difficulty Acosta faces. Rule opponents argue that it will cost small savers access to financial advice and cost them more in the long run.
Whether the DOL can back that up with hard data remains to be seen.
Impartial Conduct Standard
The June 9 Phase I implementation holds agents and advisors to the Impartial Conduct Standard. The more onerous Best Interest Contract Exemption will not come into play until Jan. 1.
The three parts of the Impartial Conduct Standard are acting in the client’s “best interest,” making no misleading statements, and accepting only reasonable compensation.
It’s the last mandate that makes some in the industry nervous. After all, what one person thinks is “reasonable” another person might not. There’s no need to go cut-rate either, analysts say.
“When we’re counseling clients, our consistent advice is that reasonable compensation does not mean that the commission you receive on an annuity has to be below average for the industry,” said Joshua J. Waldbeser, an associate with the law firm Drinker Biddle.
The idea is to charge market rates and be in the middle of the pack, he added. Consulting firms and benchmarking companies have plenty of data that will help guide advisors on compensation.
The more specific advisors are with the commissions they earn from an annuity or life insurance sale, the better, Waldbeser said.
Advisors who tell clients they earn a 4.5 percent commission on the premium paid into a fixed indexed annuity are more transparent than advisors who tell clients they stand to earn between 3 percent and 6 percent, for example.
On Jan. 1, 2018, the BICE mandates are scheduled to take effect. This means significant disclosure of information to clients, as well as a contract signed between client and advisor. The contract creates the private right of action giving clients an avenue to sue.
Sources speculate that Acosta, who is on record opposing regulation that hampers the free market, will try to knock out the contract requirement.
Et Tu, SEC?
Surprising news emerged from the SEC in June as new Chairman Jay Clayton announced that the agency will take public comment on a fiduciary standard.
Many opponents of the DOL rule maintain that the SEC should be developing any fiduciary rule. In fact, Dodd-Frank legislation specifically tasked the SEC to consider developing a fiduciary standard, but political considerations have kept the SEC from fulfilling that mandate.
In its latest announcement, the SEC said it will examine 17 different areas, including questions of how investment advice should be defined, whether the SEC should consider a “disclosure-based approach” or a “standards-of-conduct-based approach.”
The SEC vowed to study how investors and industry players have adapted to the DOL fiduciary rule in crafting its own standard. Both Acosta and Clayton say they want the DOL and SEC to work together on investment-advice regulation.
“I welcome the Department of Labor’s invitation to engage constructively as the Commission moves forward with its examination of the standards of conduct applicable to investment advisers and broker/dealers, and related matters,” Clayton said.