Five Key Points from the DOL’s Fiduciary Rule Announcement

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Roberto Rodriguez.

On May 22, Department of Labor (DOL) Secretary Alexander Acosta capped months of uncertainty about the DOL’s fiduciary duty rule by announcing that the June 9 compliance date would not be delayed further. [1] While this means that the rule’s “best interest” standard for retirement advice will go into effect on June 9, full implementation of the rule is not scheduled until January 1, 2018. Following Secretary Acosta’s announcement, the DOL clarified its policy on enforcement through the end of this year and released a new set of responses to frequently asked questions (FAQs), one of which made clear that it will continue an in-depth analysis of whether the fiduciary rule harms retirement investors or the industry, as directed by a February White House Memorandum (Memo). [2]

Secretary Acosta’s announcement indicates that we will still see changes to the rule. In particular, we expect the DOL’s ongoing review to result in changes to the Best Interest Contract (BIC) exemption that allows investment advisers to continue to receive commissions if they meet certain contract and disclosure requirements—some of which have attracted the most criticism from fiduciary rule opponents. When the DOL delayed the original April 10 compliance date, it also delayed many of the requirements for firms utilizing the BIC exemption until January 1, 2018, which gives the agency more time to further delay or roll back these requirements.

Potential changes aside, the debate over keeping or killing the fiduciary duty rule is becoming moot, at least in the minds of some industry leaders. The core idea of providing investment advice in clients’ best interest is becoming a competitive imperative. As FINRA Chairman John Brennan recently noted, “firms should keep on that track because it is going to be the way business is done… The consumer now knows the best interest concept.” As we have seen across the industry, firms are not only proceeding with actions to comply with a best interest standard, but are also seeking a competitive edge in the rapidly changing brokerage industry by touting their commitment to transparency. [3]

  1. T-minus two weeks to a “best interest” standard. The DOL delayed the original fiduciary rule start date before Secretary Acosta was confirmed, and although recent reports suggested that he was looking at ways to further delay and ultimately roll back the rule, he determined that he could not extend the original 60-day delay without running afoul of the Administrative Procedure Act. [4] Therefore, as of June 9, anyone who provides investment recommendations (i.e., financial advisors and brokers) to a retirement account for a fee will be considered a fiduciary and as a result must: (a) act in their clients’ best interests (as opposed to the current ‘suitability’ standard), (b) charge no more than reasonable compensation, and (c) make no misleading statements when speaking with clients.
  2. The BIC exemption will undergo significant changes. The primary change we expect in the coming months will be to amend the BIC exemption to no longer require that contracts allow investors to join class action lawsuits. This would be a win for industry critics who have argued that the risk of litigation could lead retirement advisers to limit the scope of clients they serve. In his Op-Ed, Secretary Acosta indicated that this change is a target when he noted an argument from rule critics that the rule would “limit freedom of contract and enforce these limits through new legal remedies that would likely be a boon to trial attorneys.” In addition, we also expect many of the disclosure requirements of the BIC exemption (e.g., web disclosure of compensation) to be streamlined before they become applicable on January 1, 2018.
  3. More clarity in FAQs. The DOL confirmed the various fiduciary rule applicability dates and provided further guidance in a set of FAQs published on May 22. [5] One of the FAQs is particularly helpful to firms that provide advice to independent fiduciaries (e.g., banks, registered investment advisers, insurance companies, and broker dealers). Advice to such entities is not considered fiduciary advice if the firm reasonably believes that the entity satisfies certain requirements, and the FAQs make clear that “negative consent” to a written representation is sufficient to establish that reasonable belief. The FAQs also explain that the DOL will not expect firms to have certain significant changes to their operations (e.g., new compensation systems) fully in place as of June 9, but will expect changes to policies, procedures, and surveillance. Further, one of the FAQs noted that several firms have started to evaluate the use of new products (e.g., “clean shares”) and indicated that potential changes to the rule would include a new streamlined exemption for innovative products or compliance solutions. [6]
  4. DOL has a non-enforcement policy, but other agencies may not follow suit. Along with the new set of FAQs, the DOL issued a bulletin to clarify its policy on enforcement during the transition period between June 9 and January 1, 2018. [7] The DOL made clear that it will not pursue enforcement and the IRS won’t assess excise taxes on retirement advisers “who are working diligently and in good faith to comply.” This should not be difficult for many of the larger firms that have already made substantial changes to comply with the rule, but will result in catch up work for some small and mid-sized banks and broker-dealers that held off on making any changes in the hope that the regulation would go away entirely. While the DOL will likely not be conducting audits during the transition period, we expect other regulatory agencies (e.g., OCC, Fed, FDIC) with larger examining staffs to conduct a review of firms’ fiduciary rule policies and procedures during targeted exams of fiduciaries (i.e., during their review of retirement plan products and services). [8]
  5. Amendments to PTE 84-24 already delayed, will they go into effect? The final rule that delayed the fiduciary rule start date also delayed amendments to PTE 84-24 (which allows commission-based compensation when selling certain insurance products) until January 1, 2018. The amendments would have changed the scope of the exemption from sales of all types of annuity and insurance products to only fixed annuities and insurance products, thereby requiring advisers to rely on the BIC exemption when selling variable and fixed indexed annuities. As we expect the other January 2018 requirements to be further delayed, we also expect the amendments to PTE 84-24 to be pushed back, and perhaps removed entirely in light of continued pressure from the insurance industry.

What’s next?

The DOL has confirmed that it will continue to review the fiduciary rule in accordance with the President’s February 3 Memo until January 1, 2018, and that it will solicit additional feedback on specific ideas for possible new exemptions or regulatory changes. Certain industry associations will continue to advocate for substantial changes to the rule, but we believe that changing the BIC and 84-24 exemptions is the most likely approach.

Some critics of the rule have called for it to be replaced with a uniform fiduciary standard for all investment accounts to be promulgated by the Securities and Exchange Commission (SEC). Although Secretary Acosta wrote that he hopes the SEC will move forward during this administration, we do not expect a rule to be proposed by the SEC this year not only because the agency still only has three out of five Commissioners, but also due to the fact that new SEC Chairman Jay Clayton has stated that his early focus will be on rules related to capital creation.

Although we do expect changes to the rule, firms should continue to move forward with activities necessary to comply with the best interest standard as of June 9. Immediate actions include updating policies and procedures, developing surveillance and monitoring protocols, and training advisers and call center staff. Firms that drive their business to align with customer needs and operate in a transparent and conflict free manner will be at a strategic advantage.


1Secretary Acosta made his announcement in a Wall Street Journal Op-Ed.(go back)

2The Memo stipulated that the DOL must review the fiduciary rule to determine whether it has an adverse impact on the industry or investors and update its economic and legal analysis of the rule. After finishing the review, the DOL has the option to allow the rule to proceed as is, propose a withdrawal of the rule, or propose amendments to the rule.(go back)

3For more information on trends toward a best interest standard in the wealth management industry, see PwC’s Regulatory brief, DOL fiduciary rule: Beyond the headlines (February 2017).(go back)

4The fiduciary rule was finalized on April 8th, 2016 and became effective in June 2016 which means that it cannot be modified or rolled back without a new rule proposal and comment period. For more information on the final rule, see PwC’s First take, Ten key points from the DOL’s fiduciary duty rule (April 2016).(go back)

5The FAQs cover questions on the transition period between June 9th, 2017 and January 1st, 2018.(go back)

6For more information on the FAQs, see PwC’s People and Organization Insight, Fiduciary rule to apply June 9 and other guidance in DOL FAQs ( May 2017).(go back)

7The Field Assistance Bulletin outlines the DOL’s enforcement policy during the transition period.(go back)

8This has been the case with OCC examiners in the past who have included adherence to ERISA rules in their exam process.(go back)

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