Best-interest contract could be casualty of DOL fiduciary rule delay

Length of time for measure's review gives SEC, other regulators greater chance to get involved in setting advice standards

Aug 15, 2017 @ 2:11 pm

By Mark Schoeff Jr.

The part of the Labor Department's fiduciary rule that has heartened supporters and caused heartburn for opponents, the best-interest contract, could become a casualty of the ongoing reassessment of the rule.

The DOL said last week in a court filing in a lawsuit over the regulation that it is seeking an 18-month delay in the implementation of the remaining parts of the rule. Two provisions became applicable in June.

The time-out will give the agency plenty of opportunity to undo the contract, which backers of the rule say gives it bite. Critics say it is too complicated and raises liability costs.

Under the legally binding agreement, brokers can earn variable compensation on products they sell to retirement investors as long as they act in investors' best interests. The regulation allows investors to file class-action lawsuits over violations, a provision that financial industry opponents are targeting.

"I don't think we're going to see that BIC signed by a financial institution," said Jamie Hopkins, associate professor at The American College of Financial Services. "It's unclear whether you need the contract, if you're not going to have the class-action lawsuits."

Even if it survives, the contract obligates brokers to many disclosures that may be simplified.

"The BIC exemption has got to be an area that DOL will look at and make significant changes to," said David Tittsworth, counsel at the law firm Ropes & Gray.

The request for information that will guide DOL's review of the rule, which was mandated by President Donald J. Trump, includes questions about the best-interest contract, providing a hint about DOL's intention to eliminate or change it.

Paul Ellenbogen, head of global regulatory solutions at Morningstar Inc., predicted the BIC will survive in some form because it's central to ensuring the rule works.

"I don't think that toothpaste can be put back into the tube," Mr. Ellenbogen said. "I see BIC as part of the process for discerning best interest. The proof will be consistency across clients in how you build a shelf of investments, how you put together portfolios, how you charge for services. The BIC becomes the promissory instrument."

The DOL's request for information also shows that exemptions may be added to the rule for the sales of products, such as clean shares, that are designed to comply.

The length of the delay the DOL is seeking, which has brought howls from supporters of the rule, foreshadows other regulators getting involved in setting investment advice standards, according to Fred Reish, partner at Drinker Biddle & Reath. The Securities and Exchange Commission has put out a request for comment on fiduciary duty.

"It is an indication that DOL wants to collaborate with the SEC, Finra and the state insurance regulators and come up with a set of rules that are compatible across all of those agencies," Mr. Reish said.

That could be a heavy lift.

"It's easy for everyone to call for a harmonized standard, but when it comes down to it, that's an extremely difficult and complex issue to deal with," Mr. Tittsworth said. "It's not for the faint of heart."

The delay request has made one thing certain: Work on the rule will continue for another couple years.

"There's no end in sight for this, which is causing a lot of frustration for compliance departments," Mr. Hopkins said.


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