Win the battle, lose the war? The fiduciary rule moves forward

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The DOL recently released a FAQ to clear any lingering confusion that may be around before the fiduciary rule goes into effect.

The Department of Labor has confirmed that the initial June 9 compliance date for the fiduciary rule will not be postponed, as opponents of the Rule had hoped. In fact, DOL has just issued FAQs that clear up some of the confusion about what those affected will and won’t need to do. Secretary Alexander Acosta reportedly shares the White House administration’s position regarding the Rule, so it would be wrong to read this as anything other than a short-term victory for the Rule’s supporters.

Acosta recognizes – as the Trump Executive Order that initiated further review of the Rule does not – the constraints placed by the Administrative Procedure Act.

DOL won’t act highhandedly, but will continue its review of the rule despite the multiple court decisions upholding it. In fact, Acosta’s statements parrot arguments that have been made repeatedly by the Rule’s opponents and rejected in the past. Odds are that wholesale changes will be made to the Rule in the future, which its supporters will undoubtedly fight.

What Happens on June 9?

A new group of people who give advice to plans and IRAs, including many brokers, will be subject to a fiduciary standard requiring them to give advice that is in their client’s best interest.

If they receive compensation that varies depending on what they recommend, they will have to follow a watered-down version of the Best Interest Contract Exemption (BICE). They won’t have to give any warranties or special disclosures, but they will also need to determine that their compensation is reasonable and avoid making materially misleading statements.

This standard has been incorporated in some revised prohibited transaction exemptions that will also become effective, but those receiving variable compensation and using BICE, the principal transactions exemption or PTE 84-24 need only comply with the 3-part best interest standard. DOL has separately stated that it will not pursue claims or enforce taxes against those acting in good faith during the transition period before Jan. 1, 2018. This weakens the rule and may stymie lawsuits before Jan. 1, 2018.

What Can We Expect on Jan. 1, 2018?

There is plenty of time to give the notice required and to hold hearings on wholesale changes to the rule, so I wouldn’t place any bets on the other parts of the rule coming in as scheduled.

Acosta has suggested that the SEC, which was consulted by DOL when the rule was developed, needs to be consulted again. The SEC was directed under the Dodd-Frank Act to consider whether a fiduciary standard should apply to all advisers, but nobody expects any action on this in a Trump Administration that is committed to scaling back Dodd-Frank. Acosta also suggested that the development of “clean shares” in mutual funds-that is, shares whose price does not include built-in commissions or 12b-1 or other fees-may obviate some of the conflicts the Rule is designed to control. An additional exemption for clean shares could make sense.

Today you are a fiduciary, tomorrow you are not? It is hard to imagine a scenario in which the Department would backtrack completely and restore the old 1975 regulation or establish new rules under which most brokers will not be fiduciaries.

How would this work after they had been operating under the new Rule since June 9? Some became fiduciaries in anticipation of the Rule, and all would find that stating that they would no longer be fiduciaries would not sit well with their clients. A substantial watering-down of the protections in the Rule is more likely.

There is bound to be a court challenge if this happens, and Congress might still act, so the ultimate status of the Rule is still in question.

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