The Fiduciary Rule: Making Sense Out of Implementation Chaos

Kirsten Spira | 07.25.17

The Department of Labor’s Fiduciary Rule has certainly been in the news lately, and has been the source of great confusion. Not only is the rule confusing, its implementation is confusing. The market is unsure of what the rules will ultimately require, and when they will be in place.

In very simplistic, non-legal terms, the rule expands when investment advisers, insurance agents and other retirement plan and IRA advisers and consultants must follow the standards of a ​“fiduciary,” and establishes what those standards are. The rule pulls in persons who in the past could give investment advice without being treated as a fiduciary (particularly, registered reps of broker-dealers). It also expands what is considered ​“investment advice” to which the fiduciary standards apply. Now, almost all investment-related recommendations provided to an IRA owner, plan participant or plan sponsor will be subject to the fiduciary standards. Imposing a ​“fiduciary” standard (as laid out in the rule) basically means the adviser has to act at all times in the best interests of his, her or its client. 

Under the new standards, any adviser providing fiduciary advice has a high burden to make sure:

• the client is fully informed
• the adviser really understands the client’s individual circumstances
• the advice is in the best interests of the client
• the client clearly understands and consents to any conflicts of interest the adviser might have, and
• the adviser is not putting his or her interests above the client.

The rule impacts the disclosures advisers must provide, the products they can offer, and the fees they can charge. The rule is very, very long and complicated. It is expected to increase the compliance burden on advisers, and also to prohibit certain compensation structures and proprietary product sales that currently exist throughout the industry. Ultimately, many expect the rule to result in consolidation within the industry or the loss of smaller securities intermediaries.

There has been a backlash against the rule, both from the securities industry and at the political level. The rule was originally slated to be phased in from April 10, 2017 to January 1, 2018. Then the implementation chaos began:

• In February 2017, President Trump issued a memorandum instructing DOL to analyze the impact of the rule, and seeking a delay of implementation. The President has asked DOL to (1) assess whether the rule could harm the ability of Americans to gain access to retirement information and financial advice, and (2) prepare an updated financial and legal analysis of the likely impact of the rule.
• On March 2, DOL issued a memorandum proposing a 60 day delay in the initial implementation of the rule, and seeking additional public comment.
• On March 10, it issued a Field Assistance Bulletin (FAB) establishing a temporary enforcement policy to advance its goal of a 60 day delay in implementation.
• On April 7, it issued an actual final rule extending the start date of the fiduciary rule from April 10 to June 9, and establishing a phased implementation process from June 9, 2017 until January 1, 2018 for certain provisions.
• On May 22, DOL issued another FAB stating that it is conducting the analysis requested by the President. In this FAB, the DOL says: 
  • It will seek additional public input on specific ideas for changes to the rule based on public comment and market developments
  • It acknowledges that additional changes may be proposed to the rule
  • Importantly, through January 1, 2018 it will NOT pursue claims against fiduciaries, plans and financial institutions who are working in good faith and diligently to comply with the rule (which it calls ​“temporary enforcement relief”).
• On June 9, the rule in its current form went into effect. Although certain components of the rule will be phased in over time through January 1, 2018, the first phase of the rule is in place. This means starting June 9, advisers have to comply with what is known as the ​“impartial conduct standards.”
• Various lawsuits against the rule have been filed, and are currently working their way through the courts. We do not know how these cases will come out, or how they will affect the regulatory framework or timeline.
• To complicate things further, on June 1, the SEC issued its own request for public comment on investment advisers and broker dealers. Based on the SEC’s statements about this topic, they may be looking to issue investment-advice standards that address similar areas of conduct as those covered by the DOL’s fiduciary rule.

Some industry experts believe the final January 1 phase-in date will be extended, given the DOL’s current investigation of the impact of the rule and its plan to solicit additional input from the public, along with the SEC movement into the arena. There is concern about the possibility that the SEC and DOL could impose confusing, differing, ambiguous and possibly incompatible compliance obligations on the same market participants. It makes sense for the SEC and DOL to cooperate with each other, seek input from the public and industry, and come up with a harmonious set of rules that are clear and balance the interests of the various constituencies. It is hard to predict how this will play out.

For now, however, the ​“impartial conduct standards” are in place. Anyone who works with plans and IRAs should determine whether the fiduciary rule applies to them, and what they need to do to comply.

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