Asset managers, broker dealers, record keepers, insurers, and employers will be impacted in different ways under the Labor Department’s fiduciary rule, but the stakeholders almost uniformly agree that its implementation should be further delayed.
In comment letters solicited by the agency, BlackRock, Wells Fargo, Empower Retirement, the Insured Retirement Institute, and the Spark Institute were among the stakeholders that argue the rule should not take effect until Labor completes the economic and legal analysis of the rule ordered by President Trump.
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The 60-day delay recently issued by the Department pushed the rule’s first implementation date to June 9, 2017, when advisors will have to comply with an impartial conduct standard when advising on IRAs and 401(k) plans.
In issuing the delay, regulators gave industry considerable short-term relief, according to some industry insiders. The requirement that stakeholders provide written acknowledgement of their fiduciary status to investors was moved to January 1, 2018, when full compliance with the rule’s Best Interest Contract Exemption is required.
“We appreciate and welcome the delay granted, but would also urge that the fiduciary rule not become applicable until after DOL has completed the examination called for in the presidential memorandum,” wrote Ed Murphy, president of Empower Retirement, the second largest service provider for defined contribution plans.
Under the memorandum, Labor’s new analysis of the rule will address its potential impact on access to retirement advice, investment products, and whether it will give rise to costly litigation.
In issuing the delay, Labor said it expects to complete the analysis before the January 1, 2018 deadline. Regulators left open the possibility of delaying the January implementation date if the Department concludes that the rule needs to be revised after its review.
But the June requirement that advisors comply with the rule’s impartial conduct standard, which says advice must be given in retirement investors’ best interest, is necessary to protect investors from receiving conflicted advice, Labor said in issuing the delay.
Labor argued it took a balanced approach in issuing its delay, and called the requirement to comply with the impartial conduct standard by June “noncontroversial,” a claim that attorneys with Davis & Harmon said is inconsistent the “thousands of pages of intense concerns about the definition of a fiduciary.”
Need to streamline the BIC
Under the rule, advisors, brokers, and insurance agents are required to use the BIC Exemption to receive commission-based compensation on sales of investments.
Since the rule became effective in June of 2016, some investment firms have announced their intention to move advisory services to a fee-based model in order to avoid complying with the BIC Exemption.
In its comment letter, BlackRock said the BIC needs to be streamlined, an argument advanced by the rule’s most ardent opponents and even some of its supporters. The country’s largest asset manager said it would not generally be required to rely on the BIC to distribute mutual funds through broker and advisor channels. Nonetheless, the firm said the BIC needs to be redrafted and implemented “only after an active dialogue with firms that would actually utilize the exemption.”
Industry targets rule’s private right of action
Labor included a private right of action provision in the BIC, which allows investors to bring class-action claims for breach of contract. Regulators designed the provision to be the rule’s primary enforcement mechanism.
While stakeholders that are opposed to the rule as it is written conveyed a need for an industry-wide best interest standard, many are calling for the private right of action provision to be removed from the BIC Exemption.
“The private right of action created by the BIC and principal transactions exemptions is not needed and must be eliminated,” wrote Wells Fargo in its comment letter.
In a ruling upholding the fiduciary rule, Judge Barbara Lynn, chief U.S district judge for the Northern District of Texas, dismissed the claim that the private right of action will lead to rampant, meritless class action claims, a position many stakeholders are clearly at odds with.
“The litigation risk, in particular the risk of overly zealous plaintiffs’ class action litigation designed to induce settlement, motivates financial institutions to take extremely cautious and restrictive approaches that may not be in the best interests of retirement investors,” BlackRock said in its comment letter.
“The right to participate in a class action should be removed from the BIC entirely and enforcement for IRAs left subject to FINRA rules applicable to disputes between its registrants and their clients and the Internal Revenue Service,” added BlackRock.
In its solicitation for comments, Labor asked industry for input on alternatives to the BIC Exemption’s private right of action that would ensure the enforceability of a best interest standard.
Morningstar’s comment letter, which was widely supportive of the rule, offered one alternative.
“Instead of using a private right of action to ensure financial institutions meet these standards, an alternative would be to collect data on all clients’ portfolios across several objective factors, quantify whether these portfolios aligned with a best interest standard of advice, and use this large set of data to identify and remediate issues,” Morningstar said.
That type of third-party data set is likely to be developed in order to help firms defend against lawsuits under the fiduciary rule, Morningstar said.