The June 9 requirement is, of course, a far cry from compliance with the full rule, which is scheduled for January 1, 2018.
The impartial conduct standards require that advice is given in the best interest of investors. Advisors can only receive reasonable compensation and are prohibited from giving investors misleading information.
The fiduciary rule’s private right of action, which gives investors recourse through class-action claims, will not apply until the beginning of next year. The Labor Department has underscored that its focus during the transition period will be on compliance and not enforcement.
Notwithstanding that intended latitude, nothing prohibits plaintiffs’ attorneys from advancing claims in the near term.
But a least one attorney currently representing plan participants in a high-stakes fiduciary claim doesn’t foresee the sharks circling advisors—at least not right away.
“As long as people are doing the right thing, there shouldn’t be much litigation risk,” said Charles Field, a partner with Sanford, Heisler, and Sharp.
Last year, Field and his firm sued fiduciaries of Morgan Stanley’s $8 billion 401(k) plan, alleging it was stacked with high-cost, low-performing proprietary investments. The suit seeks $150 million in damages on behalf of a proposed class of 60,000 participants.
According to Field, the vagueness of the impartial conduct standards may give advisors on IRAs some protection during the rule’s transition period.
“At this point, nobody is really sure what any of this means,” said Field. “The prohibition on misleading statements—that is pretty plain and obvious. With the best interest requirement, that is more complex—if a seller can establish why a product is in an investor’s best interest, for now that will suffice.”
But on the question of what exactly is reasonable compensation? “Nobody really knows,” said Field. “Ultimately, the market place is going to dictate what reasonable compensation is.”
In FAQs and other recent communications, Labor has indicated that it wants to give industry time to establish compliance programs, and allow nascent industry efforts to issue new shares of mutual funds that will give advisors and brokers more clearing managing the rule’s best interest standard.
In response to the fiduciary rule, some investment managers have rolled out T shares of mutual funds, which come with a uniform front load of 2.5 percent across asset classes, and a standard 0.25 percent trail. They are designed to create level fees between equity and fixed income funds—the former come with higher commissions.
T shares ostensibly address one area of advisor conflict by neutralizing the incentive to sell higher-cost shares of equity funds. They are expected to replace A shares of mutual funds, which traditionally have come with front loads of 5 percent and higher.
Field is among the growing number of industry insiders that see A shares becoming extinct in the foreseeable future.
“Who is going to buy an A share of a mutual fund when you can buy a cheaper T share? And if a broker has a fiduciary duty to investors’ best interests, who is going to recommend an A share when a T share is available?” he said.
According to Morningstar, dozens of investment management firms have applied to the SEC to launch fiduciary-friendly T shares. Those that haven’t are bound to do so, the firm has said.
Another developing option is so-called clean shares of mutual funds, a term coined in England after that country imposed new fiduciary rules on advisors and brokers.
Clean shares come without any sales and marketing fees and allow brokers to set their own fee levels according to the services provided.
A recent no-action letter from the SEC to Capital Group, which owns American Funds, confirmed that investment managers would not be acting as broker-dealers in issuing clean shares, so long as the sales loads and 12-b(1) trail fees are stripped.
Field said the guardrails set out in the SEC letter on clean shares are “pretty solid.”
Ultimately, how clean shares develop may set the standard for defining what reasonable compensation is under the impartial conduct standards.
“What will that do to T shares? We don’t know yet—that will take time to develop,” said Field.
Some reports suggest that filings for clean shares with the SEC have slowed as the Labor Department undertakes its review of the fiduciary rule. There's an irony in that: Labor has indicated it is waiting for the market for clean shares to more fully develop before understanding how to approach amending the rule.
In spite of the uncertainty as the market feels out new positions on compensation, Field says changes are long overdue.
“People are waking up and getting smarter about their investments,” he said. “Up to now people’s eyes have been glazed over from all the confusion—everything was shrouded in mystery.”