One of the consequences of the presidential election is that the future of the fiduciary rule (and the exemptions) is uncertain. What does that mean to advisers . . . regardless of whether they are representatives of RIAs or broker-dealers, or for that matter, if they are independent insurance agents?
The answer is that nobody knows. However, this article outlines the most likely alternatives. Those are:
- The rule will be killed by regulation or legislation.
- The rule will be implemented “as is.”
- The rule and the exemptions will be modified.
Only the second alternative (the “as is” option) could realistically be implemented by the current deadline of April 10. But, that’s the alternative that is, in my opinion, the least likely to happen. While it is low probability, it is high risk in the sense that broker-dealers and RIAs must be in compliance by April 10 if it happens. As a result, broker-dealers, RIA firms and IMOs need to continue working on complying with the new rules until they hear otherwise.
For either of the other two alternatives to play out in a thoughtful way, the applicability date of the rule will need to be delayed. That would be the first step of the process. If I had to guess, the delay would be until either December 31, 2017 or April 10, 2018.
Assuming there is a delay, I think that it would be a close call as to whether the rule would be killed or re-written. My gut feeling is that the fiduciary rule will be retained, but modified.
I say that for a few reasons. First, the fiduciary rule wasn’t the source of the greatest objections to the DOL’s guidance. Instead, that was the Best Interest Contract Exemption (BICE). Secondly, there is an argument that a rule that requires that retirement money be invested in the best interest of the investor is not, in and of itself, objectionable. In fact, many people may like that approach. Third, because of the ongoing retirement of baby boomers, many of whom are unsophisticated investors, and the rollover of their money to IRAs, there may be a perceived need to protect retirees.
On the other hand, the contrary arguments are that (1) the current system is working well and doesn’t need to be changed (and that therefore additional regulation would increase costs, without a corresponding benefit); and (2) the regulation of securities transactions should be in the hands of the Securities and Exchange Commission (SEC), and not the DOL. (One weakness with that latter argument is that insurance products, such as fixed rate annuities and fixed indexed annuities, are also sold to plans and IRAs, and the SEC doesn’t have the jurisdiction to regulate those products.)
If the SEC were to take the leadership in defining the fiduciary duty of care, there would be a uniform fiduciary definition that would apply to plans, IRAs and “non-qualified” accounts. While the conflict of interest rules for fiduciary advice to non-qualified accounts could be handled largely through disclosure, that is not the case for retirement plans and IRAs, because of the prohibited transaction rules in ERISA and the Internal Revenue Code.
To contemplate a worst case scenario, the SEC could develop a uniform fiduciary standard of care, but fiduciary advice and recommendations that involve conflicts of interest will still be prohibited by ERISA and the Internal Revenue Code. In that case, the Best Interest Contract Exemption would be revoked, and there would not be any generally available exemption for commissions, 12b-1 fees, etc. Obviously, that won’t work. As a result, BICE can’t just be withdrawn. It needs to be improved. (Of course, Congress could pass a bill that would create an exemption based on disclosures alone, but that would take time. Also, the regulatory process, with input from comments and meetings between the private sector and the regulators, is better at producing detailed guidance.)
So, while the outcome is not predictable, my “best guess” is that we will end up with a rule similar to the DOL’s fiduciary standard of care and that there will be modified exemptions that are based more on disclosures and less on prohibitions.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
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