Opponents of the Department of Labor's controversial conflict of interest rule continue to turn up the political heat. On Oct. 27, the House passed legislation sponsored by Rep. Ann Wagner, R-Mo., that
would prohibit the DOL from finalizing the rule until the Securities and Exchange Commission acts to extend fiduciary status to those who provide retail advice.
Advisers should not be distracted by all of the noise. Despite the daily drumbeat of industry-inspired opposition, a review of the political and regulatory landscape leads to the conclusion that the DOL fiduciary rule will survive largely intact.
On the political side, opponents can try to force delay through legislative action like the Wagner bill, or they could seek to deny the DOL funding to implement the rule once it is enacted. Both of these strategies look like long shots. There remains a lack of enthusiasm on the Senate side for legislation of this sort. Moreover, President Obama drew a line in the sand with
his forceful Feb. 23 announcement supporting the rule.
VETO THREAT
Senate Republicans on their own are unlikely to achieve the 60-vote majority needed to overcome filibusters or other procedural delays. And even if they did, President Obama has threatened a veto. The bill might succeed if it is attached to must-pass legislation, but the Senate simply does not have a veto-proof majority to pass it as a stand-alone.
Legislative riders attached to appropriation bills already passed by the House that would prohibit the department from using any funding to finalize the proposal would face the same challenge.
On the regulatory front, the DOL is in a strong position to defend the rule. It has offered ample opportunities for comment, is certain to
incorporate some changes to the rule that have been suggested by industry, and has been extremely careful to avoid administrative mistakes in the rule-making process that could give opponents the opportunity for a successful legal challenge.
While prognostication can be a risky business, after weighing the political landscape and considering hundreds of pages of comment letters and hearing transcripts, I will go out on a limb and offer the following 12 predictions about the rule that will come to pass:
1. A largely intact rule will be adopted in the first quarter of 2016.
2. The final rule will include all proposed carve-outs and exemptions, as well as fiduciary coverage for individual retirement accounts and rollover advice.
3. Industry groups will challenge the rule in court, but the suit will fail to prove the DOL acted contrary to law.
4. The final rule will become effective no later than Jan. 1, 2017, possibly with phase-ins after that date.
5. Some requirements in the best-interest contract exemption will be eased or clarified, including the ability to discuss investment recommendations with a client before signing the contract.
6. The reporting of compensation based on future investment performance in the contract exemption will be eliminated.
7. The exemption will be broadened to allow advisers with compensation conflicts to serve small defined-contribution plans if they fulfill the requirements of the exemption.
CARVE-OUT FOR EDUCATION
8. The carve-out for investor education will be loosened to allow reference to specific products so long as the education does not tacitly or explicitly lead to a product recommendation.
9. Fiduciary advisers who provide advice to a plan and/or the plan's participants on a level-fee basis will also be able to
offer rollover advice to the participants without having to rely on the exemption.
10. There will be significant disruption to the broker-dealer business model as firms seek to avoid the use of the exemption.
(Related read: Expect tumult for B-Ds if DOL fiduciary comes to pass)
11. The DOL will abandon the idea of a so-called “low-cost, high-quality” prohibited-transaction exemption.
12. The cost and quality of personalized advice will rise; however, the higher cost of professional advice will be more than offset by product cost decreases and process improvements.
Of course, there are many other provisions in this complex rulemaking that are not addressed here. One of the biggest remaining questions is the transition plan for existing 401(k) or IRA transactions. While department officials have acknowledged that some grandfathering procedure will be required, it has offered no hint of what that might involve.
Blaine F. Aikin is president and chief executive of fi360 Inc.
