InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

DOL fiduciary rule has enforcement gaps — and they could widen

Parts of the rule not subject to a contract requirement don't offer investors an avenue to recover losses if they receive bad advice

Sep 11, 2017 @ 2:42 pm

By Greg Iacurci

The Department of Labor's fiduciary rule, as it's currently written, has some enforcement gaps. And they could widen, especially for annuity products, depending on how the Trump administration's review of the rule shakes out.

The primary enforcement mechanism of the Obama-era regulation, which raises investment advice standards in retirement accounts, is a "best-interest contract" between an investor and financial institution such as a broker-dealer.

Beginning in January, firms that wish to use certain compensation arrangements, like commissions, must enter into a contract with an IRA investor affirming the broker's fiduciary relationship to the investor and that the investor is receiving advice that's in his/her best interest. The investor, in turn, will have a way to bring suit against the institution for breach of contract.

But, what if there's no contract? As it turns out, nothing would really change for IRA investors seeking to recover losses stemming from poor investment advice.

This is the current state of affairs. In June, the rule significantly expanded who is considered a fiduciary adviser. Because the rule's contract requirement doesn't kick in until January, there's currently no way to enforce this newly-minted fiduciary status. The DOL last month proposed a delay to the contract provision until July 2019.

So, for the next two years it is likely to be business as usual.

When the rule does fully go into effect, one thing is clear: Enforcement would still be nonexistent in a few areas. According to Micah Hauptman, financial services counsel at the Consumer Federation of America, those situations would be:

• When a broker or insurance agent recommends a fixed-rate annuity using money already in an IRA (not via a rollover);

• When a level-fee adviser recommends moving money that was already in an IRA to the adviser.

The fiduciary rule doesn't require a contract for these transactions. For example, brokers can recommend fixed-rate annuities using what's known as Prohibited Transaction Exemption 84-24, which doesn't come with a contract requirement.

The Insured Retirement Institute and other insurance industry advocates have been lobbying for all annuities, including variable and indexed annuities, to be sold under PTE 84-24. This could come to fruition depending on the outcome of a review of the rule being conducted by the Trump administration's DOL. If it does, investors would be limited to the enforcement mechanisms already in place.

For variable annuities, which are regulated as securities products, the avenue of relief would be via Finra arbitration for a violation of the "suitability" standard of conduct, a standard that's less stringent than the fiduciary standard.

The remedy is different for fixed and indexed annuities, which are regulated as insurance, not securities, products. There is no private enforcement mechanism for insurance agents.

A displeased purchaser has a few options, according to Sheryl Moore, president and CEO of Moore Market Intelligence, a market research firm:

• Most states have a 30-day free-look period, during which they can return the annuity for the premiums they paid.

• Thereafter, they still have the option of writing a formal complaint to the insurance company. The insurance company's response to such a complaint is dependent upon their findings and philosophy.

• The annuity purchaser also has the option of contacting their insurance commissioner to look into the matter. The insurance division's response will also depend upon their findings.

Though observers say it's unlikely, the Trump administration could ultimately remove the contract requirement altogether, and leave a rule that's essentially all bark and no bite.

Some proponents of the fiduciary rule believe that, absent a contract, retirement investors could benefit from the rule's expanded pool of "fiduciary" advisers in Finra arbitration proceedings. Mr. Hauptman says he believes that's an "open legal question," though.

"Just because there would be expanded circumstances in which a broker meets the definition doesn't necessarily mean that there is an explicit cause of action the investor could bring for violation of that standard," he said.

But, observers think the outlook is even hazier for insurance products. Even Phyllis Borzi, former assistant labor secretary during the Obama administration and a chief architect of the fiduciary rule, expressed a degree of skepticism.

She believes the expanded fiduciary definition would help investors in arbitration, but "there's an open question as to what the effect might be" on non-securities products not subject to Finra arbitration for disputes.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

Stocks plunge, advisers tell clients to hang tight

Though planners encourage calm, some are preparing investors for a correction.

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.

Social Security benefits losing buying power

Low inflation combined with rising Medicare costs threaten the adequacy of seniors' income.

Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print