As DOL fiduciary rule takes effect, B-Ds focus on compliance

Firms have trimmed their lineups of investment products, leveled broker compensation and standardized compensation across product lines

Jun 9, 2017 @ 10:42 am

By Greg Iacurci

After seven years of rule-making fraught with political intrigue, intense lobbying and an abundance of conjecture, the Labor Department's fiduciary rule is getting its day in the sun.

Today marks the beginning of a phased implementation period for the DOL's regulation, which raises investment-advice standards in retirement accounts and turned tens of thousands of brokers into fiduciaries overnight. As such, the rule completely redefines how brokerages can conduct business and how their brokers can interact with certain clients.

Broker-dealers have been working frenetically to get into compliance.

However, industry experts say there's much left to be done ahead of January, the second and final phase of the implementation, when the teeth of the rule fully sink in.

"This is going to be a very busy summer," said Marcia Wagner, principal at The Wagner Law Group.

For many brokerage firms, ensuring compliance with the impartial conduct standards has been no easy feat. Firms have trimmed their lineups of investment products, leveled broker compensation and standardized compensation across product lines, and debuted services to help their brokers deliver best-interest advice to retirement savers.

Experts say brokerages will shift their attention to buttoning up documentation over the next six months. Firms must be able to prove adherence to the impartial conduct standards by documenting the logic behind recommendations.


While experts say it's a good idea for firms to have this documentation already in place — especially for advisers to 401(k) plans and 401(k) rollovers, who are theoretically exposed to ERISA lawsuits as of June 9 — it isn't required until January.

Litigation risk in IRAs arises from the best-interest contract exemption, a provision that lets broker-dealers continue selling arrangements such as commissions, but only under certain conditions. One is the execution of a contract between a firm and investor that allows for class-action lawsuits.

In addition to honing contract language, broker-dealers will be drafting language for required BICE disclosures.

"There's substantial detail that has presently been put on hold that would have to be addressed in time to be ready for Jan. 1," said Andrew Oringer, a partner at Dechert.

During the June-to-January transition period, compliance with BICE requires adherence to principles-based concepts, whereas afterward BICE becomes "laden with details," Mr. Oringer said.

"I would say the most difficult [work] from a process and structure standpoint is done June 9, but the most critical from a liability standpoint is Jan. 1," said Chris Finefrock, vice president of investments at ValMark Securities Inc., an independent broker-dealer. "The framework is built. It's just how much more do we need to tighten it down, if you have the risk of getting sued on every transaction."

Andy Kalbaugh, managing director at LPL Financial, the largest independent broker-dealer, said it is focusing its compliance efforts on "helping advisers document why a recommendation is in the client's best interest," in addition to standardizing compensation, holding forums for brokers and doing fiduciary training.

"We feel good about where we are, but there's still work to be done for Jan. 1," he said.

Of course, the Trump administration could wield a regulatory sledgehammer and throw everything into flux. The president earlier this year directed the DOL to review the fiduciary rule, and Secretary of Labor Alexander Acosta has strongly hinted the agency will propose alterations ahead of January.

The Securities and Exchange Commission added to the confusion by releasing a request for comments on its own fiduciary duty rule, leading some to question whether it will try wresting the issue away from the DOL.

Broker-dealers have put forward an array of responses in reaction to the potential for rule amendments.

"I think you'll find different reactions over the next two to three months by firms," said Daniel Bernstein, chief regulatory counsel at compliance consulting firm MarketCounsel. Some who are "pretty much at the finish line" already will continue on their trajectory, while "some will put their head in sand" until there's clarity, Mr. Bernstein added.

Larger brokerages have already forged ahead with compliance and could likely go live with all the requisite January items — such as modified compensation structures, client letters, adviser training and updated compliance manuals — at present, said Amy Lynch, president and founder of FrontLine Compliance.

While the DOL has indicated it will not enforce the fiduciary rule in the interim as long as companies are "working diligently and in good faith to comply," Mr. Bernstein said firms shouldn't read this as a signal they can sit on their hands.

"What may work today may not be deemed diligent and in good faith four months from now," he said.


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