The effective date for the US Department of Labour’s epic Fiduciary Rule for the retirement industry came and went on 9th June. Among investment advisors, compliance is patchy.

The rule is designed to impose a ‘best interest’ standard on advisors and firms that make recommendations about investments to qualified retirement accounts in the US. The deadline of 9th June already represented a delay and the rule came into force at one minute to midnight, the latest the DOL could arrange it.

The rule extends the application of fiduciary standards to such areas as advice about distributions and rollovers. It applies to ERISA (the Employee Retirement Income Security Act 1974) employee benefits plans, including small plans, plan participants and individual retirement arrangements or IRAs. It excludes certain things from the ambit of “investment advice” and there are Prohibited Transaction Class Exemptions (PTCEs) for principal transactions in certain debt securities and for best interest contracts. Nasdaq states that all the advisors who used to oppose the best interest contract exemption (BICE) are, ironically, rushing to take advantage of it in order to avoid complying with the rule until it comes fully into effect on 1st January.

Impartial conduct

Advisors covered by the term ‘fiduciary,’ and all investment advice providers to retirement savers have now become fiduciaries, are expected to adhere to the rule's impartial conduct standards, i.e. consumer protection/fair dealing standards. These call for advice that is in the 'best interest' of the retirement investor. This ‘best interest’ standard has two chief components: prudence and loyalty. Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption. Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm. The fiduciary must also charge no more than reasonable compensation and make no misleading statements about investment transactions, compensation, and conflicts of interest.

Although the PTCEs (including the BICE) have technically been postponed to 1 January next year,  firms and advisors will have to ‘affirmatively’ disclose any conflicts such as those related to proprietary product, compensation or limitations on product access. Plan advisors will have to show that they changed any non-compliant compensation plans before 9th June.

Enter the SEC

The Securities and Exchange Commission has so far had nothing to do with enforcing the Fiduciary Rule. This may change, however; Jay Clayton, the new SEC chairman, said in his testimony before the Senate this week that he will be “co-ordinating with Secretary Acosta.” This is a reference to the new Labour Secretary,  Alexander Acosta, President Trump’s second choice for the job. It took most of Trump’s first ‘hundred days’ in office (the American press is always keen to weigh up every president’s achievements in this set period of time, which owes its name to the last days of Napoleon as French emperor) for the US Congress to appoint Acosta. Some commentators think that the SEC’s desire to take a hand implies that both agencies will now try to arrive at a uniform fiduciary standard, although this is nothing but informed speculation as yet.

Andrew Besheer, the project leader of DOL Fiduciary Rule Solutions at Broadridge, told Compliance Matters that financial advisors were in some danger: "While the exemptions, including the 'best interest contract' exemption, have technically been postponed until 1 January of next year, the reality is that, as an advisor, if you have a conflict related to either proprietary product forms of compensation, limitations of access to products that you offer to your clients etc., you need to be disclosing those conflicts to your client now in an affirmative way. You need to be able to document that to protect yourself in the future and to show that you're making the effort to comply with the rule.

“Though the DOL might not be taking aggressive enforcement action, there's nothing that they can do to prevent the plaintiffs' bar from taking their own – shall we call it – enforcement action. And plan advisors are the ones who are most exposed to that in the period between now and 1st January.

“Advisors to individual retirement accounts are much less exposed because the exemptions and the 'best interest' contract don't come into effect until that time. So plan advisors really do have to show that they've changed any non-compliant compensation plans before 9th June.”

Last chance to comment

Besheer had other observations to make about developments concerning the rule: “You might have heard that the Department of Labour has put out a request for information. It's currently sitting with the Office of Management and Budget awaiting approval. They've done a number of requests for public comment in the course of the development of this rule.

“This one is going to look for comments based on the Presidential Memo of 3rd February. They've already had the AARP (formerly the American Association of Retired Persons) to meet with the OMB (the Office of Management and Budget) and the DOL about this. It's expected to hit the website in (possibly) the next week. My suggestion is to keep an eye on this, especially if you're an advisor. It may well be your last chance to weigh in with your own responses on what's going on with the rule and the questions that are being asked about it. I would encourage you to look at reginfo.gov and just look for the Department of Labour's executive order review.”

The website now says that the Request for Information on the Fiduciary Rule and Prohibited Transaction Exemptions was ‘completed’ two days ago, which appears to mean that it is now open for comment. There is no legal deadline.

President Trump wrote the memorandum of 3rd February with the Fiduciary Rule specifically in mind, asking for comments about “whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

Repealing Dodd-Frank

On 4 May, the Financial Choice ‘Act’ (actually only a bill) of 2017, the Republican bid to replace the Dodd-Frank Act and the Fiduciary Rule with it, was passed by the House of Representatives’ Financial Services Committee by 34 votes to 26.

Besheer was surprisingly sanguine about the Trump administration’s much-criticised assault on the Dodd-Frank Act: “You probably heard two weeks ago when the House said, as part of its Dodd-Frank repeal, that it would also reverse the Fiduciary Rule. That got a tremendous amount of press at the time. 'House repeals Fiduciary Rule' was the phrase.

“Obviously that's not effectively the case. You have probably seen what happened this past week with healthcare. We know that tax reform is somewhere on the agenda. Dodd-Frank is somewhere on the agenda. There's a significant amount of recess days that are very definitely on the agenda, so I don't think you're going to see any activity that's final on that before the fall and there's clearly a rocky road for any kind of Congressional action.”

Don’t forget the states!

There is some evidence that a minority of advisors believes that the Fiduciary Rule will be delayed further. There is also evidence to suggest that at least half the advice industry believes that whether it is delayed or not, fiduciary policy is an idea that has found its time. This was Besheer’s belief also.

“By the way, don't ignore the states because we're certainly seeing several of the states – Nevada is the one that's got the most attention – taking their own action on a fiduciary rule, so I think irrespective of what's happened to the mechanics of the [federal] rule, the one that the DOL released that became applicable on 9th June, I think the concept of the fiduciary is here to stay.”