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The Fiduciary Rule Rises Again

If it feels like the fiduciary rule has been a topic of discussion for years, well, it has. It has gone through several stops and starts and is about to enter another phase when the Department of Labor (DOL) reveals its latest iteration of the rule at the end of 2019.

However, it’s best to take a step back and look at how we got here, what’s coming next and how other fiduciary-related regulation may affect financial advisors.

Initially, the DOL scheduled implementation of the fiduciary rule to begin in April 2017, with a phasing-in period until January 2018. Then, after the current administration requested a review of the rule, its start date was pushed back to 2019.

As it sat in limbo, the 5th Circuit Court of Appeals vacated the fiduciary rule in mid-2018 after a suit was brought by several groups, including the Financial Services Institute and U.S. Chamber of Commerce, among others. The court ruled in a 2-1 decision that the DOL’s implementation of the rule was “an arbitrary and capricious exercise of administrative power.”1

Some cheered the decision, while others lamented what they perceived as the loss of a chance to level the fiduciary playing field.

Without new guidelines in place, the industry has reverted to the 1975 ERISA provisions, including the decades-old “5-part” regulatory test for investment advice.

In May 2019, the DOL announced that it would propose a new version of the fiduciary rule in December 2019, which will then put it on a pathway for public comment and review – a process that, at best, will take six months. However, December could be too late. Considering the entire process to get a rule finalized, the DOL will most likely need to submit its rule to the Office of Management and Budget (OMB) by mid-September – or the rule could be at risk of being overruled or withdrawn due to an administration change in 2021.

To muddy the waters a bit more, the current nominee for DOL Secretary, Eugene Scalia, would potentially have to recuse himself from the department’s rewrite of the fiduciary rule, according to The Wall Street Journal. Scalia’s conflict arose due to his past corporate attorney duties when he argued against the rule in the aforementioned 5th Circuit case.2

SEC introduces Reg BI

As the fiduciary rule winds its way through the proposal period, the Securities and Exchange Commission (SEC) has tried to fill the void with its “Advice Rule,” which became known as Regulation Best Interest – or Reg BI – which was originally proposed in April 2018, adopted in June 2019, and is set to go into effect September 10, 2019 with a compliance date of June 30, 2020.3

According to the SEC, Reg BI will ensure “broker-dealer(s) would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.”

The SEC said it would provide investors with “more information about brokers’ complex pay incentives, but it also made changes from an earlier proposal which benefit brokerage firms,” including preserving the commission-based sales model.4

States make fiduciary noise

As the dust looks to settle around the fiduciary rule and Reg BI, a handful of states are attempting to fill regulatory gaps with stronger fiduciary protections.

Regulators and legislators in New Jersey, New York, Nevada, and Maryland, among others, are trying to fill a perceived void created by the absence of the DOL fiduciary rule – and to shore up what isn’t covered by Reg BI – by introducing a variety of fiduciary-minded legislation.

Namely, the various state proposals look to hold broker/dealers to a fiduciary standard if they are presenting themselves as a wealth manager or financial planner. Some of the states carry it further to include agents, investment advisors, and investor advisor reps.5

The future of the state-led fiduciary legislation remains uncertain, especially with the DOL push and a new rule expected, with concern that the effort is “bucking industry warnings about an unwieldy patchwork of rules around the country.”6

Firms and advisors practice patience

The fiduciary machinations have left firms and advisors in a genuine state of flux. Many firms worked toward updating compliance and administrative functions, anticipating the implementation of the original fiduciary rule. When it got side-tracked, some firms continued on with their procedures since the heavy lifting had been done. Others have the structure in place and at the ready.

As far as advisors are concerned, it is less likely about what future laws and regulations may bring and more about having sound procedures and policies in place so that they can stand out in the eventual fiduciary stage.

“In addition to tightening up their internal processes and procedures, broker-dealers and advisors should review their existing service provider relationships to ensure providers are able to enhance their retirement plan offering,” says Michael Savage, Manager, Retirement Services Compliance at Paychex. “This includes record-keepers, TPAs, custodians and fiduciary services.”

 

Paychex will continue to monitor these developments both at the state and federal level, and we’re committed to providing a robust and flexible platform for our advisor partners to help them comply with these rules. From our return of concessions product and fee disclosure service to our broad mix of fiduciary services, including 3(16), 3(21) and 3(38), Paychex has the platform to help advisors grow their business.

 


1. https://www.ca5.uscourts.gov/opinions/pub/17/17-10238-CV0.pdf

2. https://www.wsj.com/articles/labor-nominee-would-likely-sit-out-financial-advice-rule-making-11565343120?shareToken=st95094a2e6570453c857d5c77d1651469

3. https://www.sec.gov/rules/final/2019/34-86031.pdf

4. https://www.wsj.com/articles/new-sec-rule-heightens-broker-responsibilities-to-investors-11559743201

5. https://www.thinkadvisor.com/2019/01/23/more-states-advance-their-own-fiduciary-rules/

6. https://www.wsj.com/articles/states-pursue-their-own-broker-conduct-rules-11555666200

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