Despite Delays, DOL Rule Becoming Law Of The Land, Expert Argues
December 1, 2017 by Tracey Longo
Despite a year-and-a-half delay and an imminent legal decision in a blockbuster industry lawsuit to force the Department of Labor to vacate its fiduciary regulation, the rule is fast becoming standard operating procedure at most firms, says Marcia Wagner, principal of the national law firm Wagner Law Group.
“We will definitely see some changes and development in the law over the next 18 months, but the basic takeaway is that this law was established July 9 and I don’t think the courts would be able to undo it even if they wanted to,” Wagner told Financial Advisor Magazine. “The vast majority of firms have really embraced fiduciary standards for retirement accounts and IRAs.”
In contrast, the 22 plaintiffs who are suing the DOL to overturn the fiduciary rule—including powerhouse associations like the American Council of Life Insurers, the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable and SIFMA—are anxiously awaiting a decision from the Fifth Circuit Court of Appeals. Several sources said the decision is expected any day.
“Yes,” National Association for Fixed Annuities Counsel and Director of Government Affairs Pam Heinrich said when asked if the association would proceed with its lawsuit to vacate the DOL rule, even after the agency’s 18-month delay. “Absent changes on how the rule will go into effect in July 2019—something that hasn’t happened as of yet so we can not count on—NAFA needs to continue the fight in the court system,” Heinrich told Financial Advisor Magazine.
“After the 18-month delay ends, in the event that there are no further changes to the rule, our industry will be irreparably harmed because we will be bifurcated under two separate exemptions [for disclosing commissions and potential conflicts of interest]: BICE [Best Interest Contract Exemption] for fixed-index annuities and PTE 84-24 for fixed declared rate annuities. Putting fixed-rate annuities under BICE will harm our industry and also consumers—everyday Americans who benefit from these retirement savings products,” Heinrich said.
She said that while NAFA welcomes the DOL’s delay, the group is proceeding with the lawsuit. In a surprise move by the DOL, indexed annuities were included in the version of the BICE requirement without prior warning or a comment period. It requires sellers to do what’s best for the client “without regard” to their or their companies’ financial interests.
Another plaintiff, the U.S. Chamber of Commerce, commissioned Deloitte to study the impact of the fiduciary rule on its members and found that over 13 million investment accounts face reduced choices of retirement savings products and six million accounts face higher costs.
“Some might look at these statistics and see just numbers, not people,” said Brian P. O’Shea, senior director for the chamber’s Center for Capital Market Competitiveness. “The sheer magnitude of millions of retirement investors losing services and paying higher costs should raise concern for everyone,” he said in an announcement to members. “What also must not be overlooked is the impact on future retirement investors who could be discouraged early on and decide not to even bother starting accounts.”
The DOL finalized its 18-month delay of full implementation of its rule last week in a move the agency said would allow it to complete its review of the fiduciary rule and to propose changes and possibly alternate exemptions. The agency also said it would coordinate with the SEC and other regulators such as FINRA and the National Association of Insurance Commissions (NAIC).
Notably, the DOL stated that it anticipates in the near future that it will propose a new streamlined class exemption. This gives firms until June, 2019—a full year-and-a-half extension—to lobby the DOL for the changes they desire and to figure out how to adapt their practice to the exemptions and disclosures the DOL may require.
In the meantime, the DOL’s impartial conduct standards are already in full force, Wagner said. A number of firms, including LPL Financial, began adopting the standard last year.
The rule requiring financial professionals to put investor’s interest first when selling or recommending retirement investments, IRAs and annuities is a first for much of the industry, including brokers and insurance agents. While advisors do have an explicit fiduciary duty to investors, the DOL’s rule goes significantly further, Wagner said.
The SEC requires advisors to “merely disclose conflicts,” she added. “Under the DOL rule, the definition of fiduciary has expanded. In 18 months when the rule goes into full effect, if you disclose a conflict for which there isn’t an exemption, you’re giving people a roadmap to sue you. This is a fairly high standard,” Wagner said.
‘A lot of the operating standards, reporting, disclosures, representations and warranties may change and I do think that some may be weakened in the process,” Wagner said. “But the concept of who is a fiduciary is here to stay. That means if there are contractual issues between a broker-dealer and an IRA, you’re in a position where you can have real class-action lawsuits,” the veteran attorney said.
“This law is finalized. I don’t think the courts will have much ability to overturn it. And I’m not sure, frankly. it matters much what happens in the court system because the standard best practice is fast becoming that financial advisors, broker-dealers and registered reps are holding themselves out as providing the best standard of care. The basic question of who is a fiduciary is settled,” Wagner opined.