DOL fiduciary rule: Agency says it will come up with new ways to comply during delay period

Labor Department says it also needs more time to look at any 'undue burden' the rule may cause

Aug 30, 2017 @ 2:34 pm

By Mark Schoeff Jr.

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(Getty Images/iStockphoto)

The Labor Department said Wednesday that it will propose new ways for financial advisers to comply with its fiduciary rule during its proposed 18-month delay in the implementation of the measure's second phase.

The DOL said that the paused is needed to review the regulation under a directive issued by President Donald J. Trump earlier this year.

"More time is needed...to take a hard look at any potential undue burden," the agency wrote in the delay rule proposal, which was posted on the website of the Federal Register.

The agency is seeking to push back the original Jan. 1, 2018, applicability date to July 1, 2019, for enforcement mechanisms in the regulation, such as the so-called best-interest contract exemption that allows brokers to charge variable compensation for products as long as they sign a legally binding agreement to put their clients' interests ahead of their own. Other exemptions that would be delayed involve principal transactions and insurance and annuity contracts.

"The primary purpose of the proposed amendments is to give the Department of Labor the time necessary to consider possible changes and alternatives to these exemptions," the rule proposal states. "The department is particularly concerned that, without a delay in the applicability dates, regulated parties may incur undue expense to comply with the conditions or requirement that it ultimately determines to revise or repeal."

In another move on Wednesday, the DOL also indicated that it will not enforce the part of the best-interest contract or the principal transactions exemption that allows investors to pursue class-action suits. In a field assistance bulletin, the agency said that financial advisers who ban class-action suits in their contracts with retirement investors would not be subject to enforcement action.

In the delay proposal, the DOL promised to give brokers new ways to comply with the rule.

"The department anticipates it will propose in the near future a new and more streamlined class exemption built in large part on recent innovations in the financial services industry," the delay proposal states.

In the request for information that the DOL released last spring, the agency indicated interest in an exemption based on the use of "clean shares," or funds that don't have expenses paid by the investor that are funneled back to the broker, such as front-end loads or 12b-1 fees.

"From an industry perspective, it would probably be a much more palatable, less onerous way to comply with the rule," said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.

But Aron Szapiro, director of policy research at Morningstar Inc., cautioned that a better understanding of clean shares is required before making them the focus of an exemption.

"We believe that you could create a new way of complying that could meet the needs of investors and make it easier for firms to comply by leveraging financial innovations such as clean shares," Mr. Szapiro said. "But it's very important to get the details right around what clean shares are."

The 18-month delay proposal was approved by the Office of Management and Budget earlier this week. After it is published in the Federal Register on Thursday, there will be a 15-day comment period. After that, the DOL will propose a final rule for the delay, which also must be approved by OMB. The process could last into October.

The DOL indicated that it is open to considering modifications to the 18-month timeframe, such as ending the delay when the rule review is completed or conditioning the delay on a firm's taking steps to use "clean shares."

A delay for all firms would give an unearned break to those that have "been sitting on the sidelines," said Micah Hauptman, financial services counsel at the Consumer Federation of America.

"If it's a total delay, we question whether the economic analysis will be in the department's favor," Mr. Hauptman said.

In the economic analysis for the delay, the DOL said that many of the rule's benefits to investors are being realized through the two provisions of the measure that were implemented in June. One significantly expands the number of financial advisers who are considered fiduciaries. The other set impartial conduct standards that include giving advice in a client's best interests, charging reasonable fees and avoiding misleading statements.

The agency said that deferring for 18 months compliance costs related to the enforcement provisions of the rule would save firms about $2 billion.

"We support the DOL's proposed delay of the remaining portions of the fiduciary rule," Dale Brown, CEO of the Financial Services Institute, said in a statement. "It has only been a few months since the impartial conduct standards went in place, but we have already seen investor choice limited and retirement savings advice pushed out of the reach of those who need it most."

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