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DOL Fiduciary Rule Post-Mortem: How Long Will the Taste Linger?

DOL Fiduciary Rule Post-Mortem: How Long Will the Taste Linger?
August 28
00:04 2018

(The first part in a series of three installments)

As summer draws to a close (in the traditional sense), perhaps now is a good time to reflect on the changes in the fiduciary world over the last few months. The DOL’s Fiduciary Rule has been vacated. In its stead we now have the SEC’s “Best Interest” proposal. This three-part series will reflect on the past, present, and future of the fiduciary standard.

In March 15, 2018 the U.S. Court of Appeals for the Fifth Circuit vacated the DOL’s 2016 Conflict-of-Interest (a.k.a., “Fiduciary”) Rule. The 2-1 decision sided with the U.S. Chamber of Commerce in its case against the DOL. Three months later, on June 21, 2018, the court issued its formal mandate which officially nullified the DOL’s Rule. Prior to that, on May 7, 2018, in anticipation of this mandate, the DOL issued a Field Assistance Bulletin (“Field Assistance Bulletin No. 2018-02”).

This Bulletin addressed the subject of a Temporary Enforcement Policy. It stated “for the period from June 9, 2017, until after regulations or exemptions or other administrative guidance has been issued, the Department will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.”

“It is very likely that many advisors who previously relied on the safe harbors in the rule will continue to rely on the DOL’s Field Assistance Bulletin 2018-02 that allows conflicted advice to retirement plans and account holders as long as a good faith effort is made to comply with the Impartial Conduct Standards,” says Duane Thompson, Senior Policy Analyst at Fi360 in Pittsburgh, Pennsylvania. “As firms became more comfortable with operating in a fiduciary environment, it’s certainly possible they will continue to comply with these fundamental duties of loyalty and care even if the FAB is superseded by other guidance.”

While this Temporary Enforcement Policy remains in effect, it’s not the lingering aftertaste of the now vacated Fiduciary Rule. Indeed, despite its failed effort, the resulting impact will be difficult to reverse. “Regardless of the DOL Fiduciary Rule being vacated, the proverbial cat is now out of the bag,” says Mike Walters, CEO of USA Financial in greater Grand Rapids, Michigan area. “Important attention and scrutiny is now focused on the most damaging conflicts of interest that some have exploited for their financial gain over benefit to their clients. The vacated rule has struck a nerve and has permanently changed countless institutional practices and procedures that will far outlive any specific memories.”

The concept of “fiduciary” has moved from the regulators domain to the marketer’s tool kit. There, it will be more difficult to ignore. “The genie is out of the bottle,” says Robert Johnson, Professor of Finance, Heider College of Business, Creighton University, Omaha, Nebraska. “Many financial firms fought the fiduciary rule and believe they have won, but they will be at a competitive disadvantage as some firms have, or are in the process of, positioning themselves to adhere to a higher standard. Many more clients know the difference between someone who acts as a fiduciary and one who doesn’t. There is much greater scrutiny by clients today than there was before the DOL advanced the Fiduciary Rule.”

While the DOL’s attempt may have died, the awareness it generated has no doubt influenced other regulators. “The heightened standards are difficult to come off from once they have been released,” says Korrine Kohm, Director of Retail Wealth Management Services, Compliance Solutions Strategies in the greater New York City area. “More retail investors have better transparency and are better informed about the fees and expenses incurred by retirement plans and participants; therefore, some transparency has been achieved which is a positive. We already see the impact in how the SEC and state regulators are moving to address the issue (e.g., SEC exam priorities, Retail Strategy Task Force, etc.) which further progresses the importance of the topic.”

The legacy of the Fiduciary Rule will remain as long as the industry – both the service providers and their clients – foresee these other regulators continuing the process initiated by the DOL. “Many plan sponsors and brokerages already implemented internal changes anticipating the Rule’s enactment,” says Ted McNamara, an attorney at Kaufman Dolowich & Voluck in Fort Lauderdale, Florida. “Some may leave these changes in place in anticipation of similar rules. Indeed, the DOL continues to seek a heightened standard for ERISA plan sponsors and others rendering investment advice. Simply reverting to prior standards appears unlikely. We anticipate future rule proposals like the SEC’s ‘Best Interest’ Proposal, that apply heightened standards for disclosure without placing onerous burdens on plan sponsors.”

For evidence of influence, we need look no further than SEC’s Proposal (which will explore more thoroughly in or next installment). Thompson says, “It can be argued that some elements of the SEC’s best interest standard for brokers contains language from ERISA such as the prudent investor standard and a requirement that firms establish safeguards to ensure that a broker’s advice is in the best interest of the customer. So, no matter how it’s described – as a suitability-plus or quasi-fiduciary standard – Regulation Best Interest does carry along the seeds of the DOL rule that raise the bar for advice.”

Still, it can’t be denied the demise of the DOL’s Fiduciary Rule will leave us wanting in some areas. “Under the proposal Rule,” says McNamara, “plan sponsors and brokers would have had to strictly operate in the participants’ best interest without regard for their own. Conflicts-of-interest and all fees and commissions must have been fully disclosed (in monetary form) to participants. The proposed fiduciary standard was much higher than its predecessor. The former requires that the client’s interests are placed above the financial professional at all costs. The latter simply requires investment recommendations that meet client needs on an objective basis.”

Although incorporating some of the DOL elements, the SEC’s Proposal is seen as weaker. “While the SEC and NAIC have adopted elements of ERISA’s prudence standard in their proposed new rules,” says Thompson, “the versions of a ‘best interest’ standard included in their current proposals are not as strong as the fiduciary duty of loyalty under ERISA and rely chiefly on disclosure to manage conflicts.”

With the DOL’s version of the fiduciary standard, some fear investors will lose vital protection. “What has been lost is that some financial advisors are still able to recommend financial products that are merely suitable for clients instead of being in their best interests,” says Johnson. “Financial advisors want to call themselves and be viewed as professionals – and, the vast majority are true professionals – yet they can sell investments that are merely suitable for their clients. Imagine if doctors or lawyers only had to offer ‘suitable’ advice to their clients, instead of advice that was in their client’s best interest.”

Once vacated, the fiduciary “footprint” got a lot smaller, meaning more providers can continue to operate outside the fiduciary umbrella. “The other major area of ‘loss’ is the replacement of the greatly expanded fiduciary definition of a 3(21) advisor with the 1970s vintage five-part definition,” says Thompson. “This means there will be far fewer financial representatives held to a fiduciary standard of care when they provide retirement advice than would have been the case under the DOL’s Fiduciary Rule.  It’s also been reported that the NAIC committee working to draft an updated suitability rule for annuity transactions has dropped the ‘best interest’ descriptor, although New York has moved ahead on its own with one that it has suggested the SEC consider in its own proposal. Unless the SEC clarifies that small plan sponsors will be covered by Regulation Best Interest, the DOL’s old five-part test is likely to apply, meaning that many brokers and insurance producers could escape both ERISA fiduciary accountability and the SEC’s proposed Regulation Best Interest.”

There’s also a feeling that, now that the DOL Fiduciary Rule is gone, we’ve lost some clarity. “First off,” says Kohm, “the impartial conduct standard has been lost by the vacated Fiduciary rule.  The SEC’s Regulation Best Interest just doesn’t go as far to help clear the confusion surrounding the capacity that ‘advisers’ are acting in, especially dually-registered firms – are they fiduciaries or are they simply registered reps selling a product? What both the DOL Fiduciary Rule and the Best Interest proposal demonstrate is that valuable disclosure can turn into jumbled run on sentences in too many cases.”

The broadest concern, however, is that while the SEC can cover both taxable and retirement investors, unlike the DOL, its scope is not as wide when it comes to financial products. “At first glance,” says Walters, “what has potentially been lost as a result of the vacated DOL Fiduciary Rule is the scope of reach that the DOL may have been able to exercise while other regulatory bodies may not be able to duplicate. For example, in the early days of the DOL Fiduciary Rule debate, Elizabeth Warren zeroed in on the ‘Super Bowl style rings and extravagant trips’ being awarded to insurance-only licensed agents selling fixed annuities. It is highly questionable whether the SEC will somehow gain authority over the State licensed insurance agents as they may over registered representatives and registered investment advisers.”

Despite the downside, it appears we may continue to live with the ramifications of the now-vacated Rule. “The DOL’s proposed Fiduciary rule sought to promote transparency and disclosure,” says McNamara. “The proposed Rule garnered media attention and brought the issue of protecting plan participants (and individual investors) into the national spotlight. The proposed Rule is gone, but not forgotten.”

Next Week: The SEC’s “Best Interest” Proposal – A Step Forward or a Set Back?

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Dennis Myhre
    Dennis Myhre August 29, 09:42


    A well written, accurate and timely article…. ‘nuf said!

    D Myhre

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author August 29, 11:38

    Thanks, Dennis!

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