DOL’s New Fiduciary Missive Invites Questions, Induces Agita
The Department of Labor’s pre-holiday weekend request for public comment on ways to modify its fiduciary rule governing advice on retirement investing creates potential openings for the brokerage industry but also inflates ongoing uncertainty for both brokerage firms and investors, critics and proponents of the rule said Friday.
The DOL’s “request for information,” published on its website Thursday evening, raises questions on such crucial issues as whether the government should alter or eliminate contractual and warranty requirements that are the heart of the enforcement mechanism for firms selling commission-based retirement products through best-interest contact exemptions.
The request also seeks comments on whether implementation of the exemptions scheduled to take effect on January 1, 2018, should be delayed and whether product innovations such as “clean” shares and fee-based annuities being developed in response to the rule that was partially implemented on June 9 are making some of its provisions unnecessary by eliminating advisory conflicts.
“As long as they don’t have a firm deadline and a clear message about what the rules are going to be, firms are going to be reluctant to commit to making the changes necessary to fully implement the rule,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “There will never come a time when they don’t claim they need more time to implement.”
Even industry executives expressed concern about the ongoing uncertainty.
“It’s so disheartening the way we’re being whipsawed by the two sides of the aisle,” said Lon Dolber, founder and chief executive of American Portfolios Financial Services, a Long Island-based independent broker-dealer with about 800 advisors, referring to the fiduciary rule fluctuations between the Obama and Trump administrations. “Just tell us what the best approach to this should be so we can deal with it. This uncertainty is the worst thing for business.”
Many brokerage and insurance firms, to be sure, are expected to seize on the new DOL missive to argue against the need for more radical changes and, in particular, to remove the threat of class-action litigation that would be allowed as of January 1, 2018, for violations of the best-interest contract exemption. That threat led firms such as Merrill Lynch, JP Morgan Securities and Commonwealth Financial last year to say they would flatly prohibit brokers from using the exemption to sell retirement products for commissions. Some of the firms have modified their stances as the outlook for full enforcement dimmed, and they and others could now further modify their plans.
A Merrill spokeswoman said the company had no comment on the new DOL information request. Morgan Stanley, the largest retail brokerage firm as measured by its almost 16,000 financial advisors, is reviewing the DOL document but had no immediate comment, a spokeswoman said.
Recent remarks by the new heads of the Securities and Exchange Commission and the DOL about working together on a broader fiduciary rule applying to all investment advice had made a delay of the January 2018 implementation date likely, even before Thursday’s information request, lawyers and other observers said.
“I figured it was inevitable,” Roper said. “Of greater concern are the questions about the contract/liability provisions and coordination with the SEC. Industry rule opponents’ top goals for defanging the rule are rendering it unenforceable by getting rid of the contract requirement and getting a weak, watered down SEC rule to substitute for compliance with the DOL rule….We clearly still have a fight ahead of us.”
Comments about extending the applicability date of the rest of the rule are due 15 days from publication of the information request in the Federal Register, which is expected next week. Comments on other questions in the proposal, which was signed by Deputy Assistant DOL Secretary Timothy Hauser, a key author of the Obama administration fiduciary rule, are due 30 days after publication in the Federal Register.
Hauser’s document responds to President Trump’s order to the DOL in February to prepare an updated economic and legal analysis of the rule to consider whether it may harm investors by reducing retirement savings options.