Executive Summary
The big news this week was an Op-Ed published by Labor Secretary Acosta in the Wall Street Journal that declared, in no uncertain terms, that there will not be any further delay in the Department of Labor's fiduciary rule beyond June 9th. Despite all the industry protests, that have continued for more than a year, and various attempts at (further) delays, financial advisors who provide investment advice to retirement investors will be required to adhere to the "Impartial Conduct Standards" after June 9th, requiring that they give Best Interests advice, for Reasonable Compensation, and make No Misleading Statements... as any fiduciary should. However, the permanence of the rule on June 9th still doesn't mean the fighting over DoL fiduciary is done yet!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the coming fiduciary obligation for advisors serving retirement investors after June 9th, why the implementation of the DoL fiduciary rule was not delayed again, and why the DoL fiduciary rule still isn't a done deal yet, despite (and in fact, because of) what Secretary Acosta announced this week.
As regular followers of this blog know, the fact that the DoL fiduciary rule will not be delayed further shouldn't be news. As has been discussed here repeatedly in the past, and now fully confirmed by Secretary Acosta, the requirements of the Administrative Procedures Act simply left "no principled legal basis" to further change or delay the June 9th applicability date. However, it's crucial to recognize that the full DoL fiduciary rule is still not going into effect come June 9th, because part of the prior delay also delayed enforcement for most of the rule until January 1st of 2018. As a result, there is no actual Best Interests Contract... annuity agents will not have to honor the Best Interests Contract Exemption between now and the end of the year (and can rely on the less stringent PTE 84-24 when selling annuities into an IRA instead)... new disclosure requirements won't apply... and firms can still sell proprietary products while brokers receive conflicted compensation!
What does apply, though, is the requirement to adhere to the Impartial Conducts Standards, which is the core of what it takes to be a fiduciary under the rule: providing best interests advice, for reasonable compensation, and make no misleading statements. However, there will be no requirement to actually sign a Best Interests Contract, which means there won't necessarily be a full fiduciary contract in place, and in turn means it's not really clear how enforceable the fiduciary rules will really be through the end of the year. Especially since the Department of Labor itself said, in a follow-up 11-page 15-question FAQ, that it will be focused on "compliance assistance" in the coming months (and not necessarily focusing on citing violations and doling out penalties).
But the real reason it matters that full DoL fiduciary enforcement won't be coming until the end of the year, is that it provides another 6 months for fiduciary opponents to lobby for modifying the rule. In other words, DoL fiduciary may not be getting repealed and the June 9th date is final, but that doesn't mean this is the final rule. President Trump's Executive Memorandum back in February, which directed the DoL to re-evaluate the rule and consider amending it, is still in effect, and a proposal may be coming. In fact, Secretary Acosta's Op-Ed emphasized that while the rule is final, the Department of Labor is still considering revisions to the fiduciary rule, but that "the process requires patience", and that there may even be another enforcement delay (further into 2018) while the DoL considers new exemptions or other potential revisions as it issues a new Request for Information and new Public Comment periods.
In the end, this means that while a new fiduciary rule may soon be the law of the land for all retirement accounts, what, exactly, will be required to comply with that fiduciary rule in the long run, is still wide open and uncertain. The Impartial Conduct Standards requiring best interests advice, for reasonable compensation, with no misleading statements, will take effect soon. But the true obligations of Financial Institutions to monitor and oversee that activity, and the nature of enforcement and accountability for the fiduciary duty, is still not yet fixed and permenant... so get ready for a whole lot more DoL fiduciary debate over the next 6 months!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
I'm here at the FPA Georga Regional Symposium, and I want to talk about the big news this week that's been buzzing around, which was the announcement by Labor Secretary Acosta that there will not be any further delay in the Department of Labor's fiduciary rule beyond June 9th.
The news hit late Monday evening in an op-ed published by Labor Secretary Acosta himself in the Wall Street Journal, and in the article, Secretary Acosta specifically acknowledged that the reason the DoL fiduciary rule will not be delayed any further is the Administrative Procedures Act, which is the technical rules that dictate how regulations get created or eliminated. Under the APA, it simply wouldn't have followed the rule of law to make any further delay beyond June 9th. Secretary Acosta's comment, and I quote, was:
"We have carefully considered the record in this case, and have found no principled legal basis to change the June 9th date."
Now, for those of you who follow this blog regularly, the fact that DoL fiduciary's going to stay as a result of Administrative Procedures Act shouldn't be news. In fact, I did an Office Hours just like this the morning after President Trump was elected last November and pointed out that, you know, despite all the buzz at the time that the Republicans were going to kill the rule, that DoL fiduciary was going to stick. And I specifically said, at worst, the April 10th date could get halted a month or few, and that's what happened, right? A two-month delay, and now here we are. It's going to take effect on June 9th. That's just the reality of how regulations actually work. You can't just wish them away. Both parties have created rules to keep the other side from just immediately rolling back rules right after a change in power.
DoL Fiduciary Effective June 9th, But Enforcement Is Still Delayed [Time - 1:57]
Now, all that being said, it's really crucial to note that even when June 9th comes, the full Department of Labor fiduciary rule is not taking effect on June 9th. Because part of the last delay, the one that pushed the rollout from April 10th to June 9th, delayed enforcement for most of the rule until next year (January 1st of 2018). And so, as a result, there's no actual best interest contract that has to get signed between June 9th and the end of the year. Annuity agents will not have to honor the best interest contract exemption between now and the end of the year, and can continue to rely on the less stringent PTE 84-24 rules when selling annuities into IRAs. The new disclosure requirements won't apply. Firms can still sell proprietary products. Brokers can still receive conflicted compensation.
What does apply is the requirement to adhere to what are called the impartial conduct standards, which is the core of what it takes to actually be a fiduciary under the rule. It means you have to provide best interest advice for reasonable compensation and make no misleading statements. And that three-pronged test will still apply to any advice that gets applied. But you won't actually have to sign a best interest contract to adhere to it, which means there won't necessarily be a fiduciary contract in place for consumers to sue advisors for breach of fiduciary duty.
In addition, on Monday, when the op-ed came out that the rule wasn't going to be delayed, the Department of Labor also issued its own Field Assistance Bulletin 2017-02, which specifically stated that the DoL will not aggressively enforce the fiduciary rule during the transition period, either. Instead, it calls it a "temporary enforcement policy", which would be to not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions.
In practice, this kind of transition period for the fiduciary rule is really kind of awkward. The fact that the impartial conduct standards will apply means fiduciary obligation is attached to an advisor's actions going forward, but the lack of a full best interest contract exemption means it's not entirely clear who would enforce the fiduciary rule against advisors, or, more specifically, the non-fiduciary actions and abuses that happen between June 9th and the end of the year.
DoL tried to sort of clarify the situation further, and in addition to the Field Assistance Bulletin, they put out an 11-page, 15-question FAQ (frequently asked questions), to try to further explain how this temporary enforcement policy would work during the transition period. And even the DoL emphasized that they're going to focus on compliance assistance and try to help you understand how to comply with the rule, not enforcement that goes out and cites violations and doles out penalties.
Firms that really don't want to get sued or take the risk of getting sued and being deemed acting in bad faith, are likely still going to step up and comply with the full intent and spirit of the rule, just in case, because you don't want to be the lawyer at a large firm that says, "Eh, we don't think they're going to enforce much," and then find out you crossed the line, and get in trouble. But I suspect there are going to be firms that push the line more. Firms that perhaps might not make all the fiduciary adjustments during the interim period.. that might not make additional disclosures... might not obligate themselves to any more fiduciary duty than what the impartial conduct standards require.
Delayed DoL Fiduciary Enforcement Allows Time For Fiduciary Modifications [Time - 5:09]
But here's why this whole dynamic of final June 9th rule with delayed enforcement matters, because it means there's now time between June 9th and the end of the year to modify the fiduciary rule. In other words, it's not getting repealed, and the June 9th date is final, but that doesn't mean this is the final rule. Because, remember, back in February, President Trump issued an executive memorandum directing the Department of Labor to reevaluate the whole rule, and that memorandum is still out there. In fact, it spurred a new public comment period that ran back in March, where the DoL collected comments to conduct a new regulatory impact analysis, looking at: are investors being harmed by the rule, are we losing access to advice, is the fiduciary rule causing "dislocations" in the retirement services industry? And perhaps the big one, is the rule likely to increase the cost of litigation and drive a rising cost for investors?
We haven't seen the outcome of that public comment. The DoL hasn't proposed anything new or different since that public comment period closed a month ago. But a proposal may be coming. And, in fact, the tagline to Secretary Acosta's op-ed in the Wall Street Journal itself announcing that the rule wouldn't be delayed was, "As the labor department acts to revise the fiduciary rule, the process requires patience."
I don't think there is a clearer way than that to say it. This isn't over. In fact, even the FAQs that the DoL issued, Question 4 and 5 under the FAQ specifically acknowledged the DoL is still working on the president's memorandum, and it intendeds to issue a new request for information to get more, quote, "public input on specific ideas for possible new exemptions and regulatory changes based on recent public comments and new market developments."
The FAQ even agrees with the possibility that the enforcement date could be delayed again further beyond January 1st, 2018, as the DoL considers more adjustments. So the fiduciary rule will be law June 9th. The impartial conduct standards will be the rule of law on June 9th. But it's not clear when this thing is actually going to be substantively enforced, or when the actual best interest contract is going to have to be signed.
Technically the fact that the DoL can propose a new rule means they could literally propose an entirely new rule that completely eliminates this one and goes back to the way things were. But remember, the rule that we got now took almost six years to get through. Multiple proposals, multiple comment periods, re-proposals, new comment periods, delays, etc. So the odds of a new replacement rule are minuscule, because it would face all the same uphill battles, and I don't think anybody wants to be fighting for a rule repeal until 2023.
But that doesn't mean that key provisions couldn't be changed to soften the rule.
DoL Fiduciary May Still Be Defanged [Time - 7:55]
And ultimately I think you're going to discover that is what dominates industry conversation about DoL fiduciary for the rest of the year. Simply put, the battle is not over yet at all. I said this last November, and again when President Trump issued the memorandum in February. The industry's belief that the rule was going to be outright repealed before it rolled out was flat-out wrong. I said it from the beginning. It wasn't going to get repealed because it just wasn't feasible under the Administrative Procedures Act, and that's exactly what happened.
But I also warned all of you that the delay to June 9th was probably going to be the last and that the rule would stick, but that after the rule took effect, the real fight would be how it's going to be enforced, whether it's going to be modified or defanged, or potentially gutted more severely. And that is still on the table. I've pointed out several times, even the DoL's commentary acknowledged that the rule was going to stick on June 9th, but it's gearing up for a process that requires "patience".
New public comment periods are coming. A new request for information is coming. The fact that the DoL would actually state in official guidance that they're already considering a further delay to the January 1st, 2018 enforcement date, and that the Labor Secretary himself said, "Please have patience with us," is, I think, all the signal you need that more is coming.
And it's important, because the reality is, it's not enough to have a theoretical fiduciary rule. I know a lot of advisors who already act as fiduciaries say, "You just say you're a fiduciary, and that's that." But that's really not it. If it's not enforceable, it doesn't matter. Not really. Because if it's not enforceable, anybody can say they're a fiduciary, and it sounds like a great marketing term, and there are no consequences. The consequences and how enforcement works are crucial.
And because of that, I think that's where you're going to see the focus between now and the end of the year. I think we're going to see proposals to kill the class action lawsuit provision, even though I actually think it's the single most important consumer protection in the entire legislation. But that's actually why it's going to be targeted for revision, because it's the most disruptive part of the entire rule. There are a subset of firms out there that are terrified of that class action lawsuit risk, particularly the firms that know their brokers and agents are not well-trained and are not capable of meeting a fiduciary duty of care and making prudent recommendations.
I mean, after all, it's hard to even know what the right fiduciary recommendation is when your only training is a two to three-hour regulatory exam on basic rules and a little bit of product training. So how long until some attorney files a class action lawsuit against an entire institution alleging that all of their brokers and agents didn't have the training, education, and professional designations to even know how to fulfill their fiduciary duty?
The industry wants the class action provision gone. Similarly, I think they're going to take a shot at dialing down some of the disclosure requirements. There'll probably be more fighting about whether annuities should really be subject to the best interest contract exemption or go back to PTE 84-24 again. And even the DoL acknowledged that the shifts that are already happening in the industry are raising the question about whether new streamlined exemptions might be appropriate.
For instance, the original rule gave this streamlined exemption called Level Fee Fiduciary for those who receive only level fees and no commissions. But now a lot of broker-dealers are offering "clean shares," which are institutional-style shares with no embedded commissions, and the broker-dealer simply layers their own completely level commission on top. So it's not a fee, because it is a commission, but it's a level commission. And we've actually seen levelized commissions meet fiduciary duty in other sections of the ERISA fiduciary rules. So maybe there'll be a proposal for a new streamlined exemption for levelized commissions in addition to level fee fiduciaries?
But the bottom line is just to understand that the fighting about DoL fiduciary is not over just because the rule is taking effect on June 9th. I warned this months ago. It's playing out exactly as expected. And the real fight is gearing up now about whether the rule gets defanged a little or gutted completely. And so, while the fiduciary rule may soon be law of the land for retirement accounts, what it takes to comply with that rule is still wide open and uncertain.
The impartial conduct standards require best interest advice for reasonable compensation with no misleading statements, and that's going to hit. But what that means, what you have to do to comply, what compliance obligations are there to oversee it... get ready for a whole fiduciary debate over the next six months, and possibly even expansion. Because Secretary Acosta, in his op-ed, also openly invited the SEC to become part of the conversation, which means we may start seeing the groundwork get laid already for a uniform fiduciary standard for all investment accounts, not just retirement accounts, to take shape soon. Which I think is good in the long run, but very messy if we're going to figure out how to blend all this together while the DoL's rule is still in flux.
But in any event, I hope that's some helpful food for thought about where things stand and why you really shouldn't be viewing DoL fiduciary as a done deal even though the June 9th date is going to hit. This is Office Hours with Michael Kitces. We're normally 1 p.m. East Coast time on Tuesdays, but I adjusted this week so I could get a little time to read the Field Assistance Bulletin and all the FAQs and try to give you a little bit of insight into what's likely coming next. Thanks for joining us, and have a great day, everyone!
So what do you think? Will the enforcement date of January 1st, 2018 get delayed? Will DoL fiduciary still be defanged? What changes do you think we will see? Please share your thoughts in the comments below!
Methinks the tail may be wagging the dog here. There is a simple fact, and that is that a fiduciary standard has been articulated and encoded in federal statutes, and that makes it the law of the land. The DOL has only very limited policing authority, so the threat was never from that direction. The threat is that in the event of a major market decline, which is a near certainty at some point, the losses suffered in an IRA will be recoverable by the IRA owner/beneficiary if the advising/selling agent or agency has failed to follow the law in recommending and/or facilitating the purchase.
It matters not if “enforcement” is in place. The real enforcement will come when a FINRA arbitration, or in some cases, a lawsuit is filed. Treating the Rule as though it is fully in force is the only prudent course of action.
Yes, but legal liability is DRASTICALLY more limited if the lawsuits are one rep at a time, in one private arbitration at a time, with no ability to gain scale or set precedents.
That’s while the battle over the Best Interests Contract, and its ability to require a private right of action through a class action lawsuit matters so much. It drastically ups the stakes of (court) enforcement and accountability for fiduciary breaches, especially those that occur on a systemic basis across an entire financial institution…
– Michael
Michael,
From the macro level you are correct, although the class action right has been there all along, albeit in a less well defined legality. I am of the opinion that the failure of individuals to follow the letter of the law because of lack or lax enforcement could be devastating years into the future.
ERISA and FINRA’s effective statute of limitations is six years, and can be longer. That means that beginning on June 9, selling or advising regarding an IRA or rollover in violation of the Rule as it exists today, could be the subject of a filing in the year 2023. My impression is that absent “enforcement” individuals have some kind of sense that they are not at risk until or unless the enforcement date arrives.
As you note, and in my humble opinion, if a BD or RIA elects to not treat the rule as being fully in force just because the enforcement date is in the future, that BD is opting to become a class action target.
Absent the DoL’s rule itself, no B/D or RIA has to worry about being the target of a class action lawsuit, because the account agreement or advisory agreement can include a mandatory arbitration clause that forces the client to waive the right to a class action suit.
It’s only the DoL fiduciary rule, and the Best Interests Contract rule, that prevents firms from forcing everyone to waive their private right of action in the first place. But that won’t apply until 2018 now (or further in the future, if the DoL delays again…)
– Michael
Five different advisors could look at the same client’s situation and could offer five differing proposals to serve the clients best interests. Is the key issue the process of creating a best interest recommendation, rather than the recommendation itself?