The 4-Corners of the DOL Fiduciary Rule as things stand TODAY!

Target Readers:

  • Those confused by the DOL Fiduciary Rule and current news.
  • Those in denial and/or not adhering to the current rule status.
  • Those who have received erroneous info from IMOs/FMOs.

Talking Points:

  • Like it or not the DOL rule is already in effect.
  • Advisors are at risk if they are not adhering to the rule.
  • Annuity companies are auditing for PTE 84-24 as of January 2018.
  • The ground has begun shifting again under the DOL rule.

Here’s the Skinny:

As promised, here is my high-level synopsis of what I have been calling “the 4-Corners of DOL status:”

1)  JUNE 2017:  DOL Fiduciary Rule Transitional Relief (currently in effect thru July 1, 2019):

  • Advisors to retirement investors, on all qualified monies and related advice, will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9, 2017. These fiduciary standards require advisors to adhere to a “best interest standard” when making investment recommendations, charge and/or receive no more than reasonable compensation for their services, refrain from making misleading statements and manage any conflicts.
  • The Best Interest Contract Exemption (BICE) applies only to hierarchies involving a Financial Institution (FI), which the DOL recognizes as a BD, RIA, bank or insurance company. FI’s and their advisors must adhere to that stated above, however, all other remaining conditions are delayed until July 1, 2019, such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors (meaning written disclosure and client signature is not required under BICE).
  • The amendments to the Prohibited Transaction Exemption 84-24 (PTE 84-24), which applies only to agents/advisors (not including FIs), relating to insurance and annuities is delayed until July 1, 2019, other than that listed above which is applicable on June 9, 2017. Under the transitional PTE 84-24, the agents/advisors must disclose conflicts of interest plus the sales commission, expressed as a percentage of gross annual premium payments for the first year and for each of the succeeding renewal years, that will be paid to the agent in connection with the purchase of the product. Documentation must be provided to and signed by the client and retained by the agent/advisor for 6 years (meaning written disclosure and client signature is required). NOTE: Many insurance companies announced that they would begin random auditing for PTE 84-24 documentation starting in January 2018.

(for further info and complete footnotes visit https://advisorskinny.com/2017/08/29/did-you-get-abandoned-to-fend-for-yourself-on-dol-pte-84-24/)

Here is a DOL compliance flowchart schematic that may help you visualize the flow and structure that is mandated by the DOL Transitional Relief period under the DOL Fiduciary Rule.

2)  FEBRUARY 2018:  Massachusetts charges Scottrade with the first known enforcement action under the DOL Fiduciary Rule.

“Massachusetts charged Scottrade with dishonest and unethical conduct and failure to supervise, in what is the first known enforcement action under the Department of Labor’s revised fiduciary rule.”

Essentially this was the result of their running two sales contests between June and September 2017.

“The Massachusetts complaint asserts that the Scottrade sales contests encouraged their brokers to put their own interests — winning $285,000 in cash prizes for attaining new assets — ahead of their clients’ interests in building their nest eggs. The complaint seeks an order forcing Scottrade to cease and desist, as well as censuring the firm, requiring it to disgorge ill-gotten profits and imposing a fine.”

DOL officials had previously stated they would not pursue claims against “fiduciaries working diligently and in good faith to comply.”

One would assume, among other allegations, that Massachusetts does not believe that Scottrade was “working diligently and in good faith to comply.”

Massachusetts Secretary of the Commonwealth, William Galvin, further stated, “If the Department of Labor will not enforce its own laws and rules, then the states must do what they can to protect retirees from firms who believe they can play with peoples’ life savings by conducting sophomoric (sales) contests.”[5]

Other States are expected to follow the Massachusetts lead.[6]

Many believe that any (and all) sales contests or sales incentives create a conflict of interest and negate a firm’s ability to comply with the best-interest standard.  The Director of Investor Protection at the Consumer Federation of America said the case “perfectly illustrates the kind of practices that go on behind the scenes at firms that claim to be complying with a best-interest standard.”

(for further info and complete footnotes visit https://advisorskinny.com/2018/02/27/dol-fiduciary-rule-violation-charges-proof-the-dol-rule-is-live/)

3)  MARCH 2018:  The 10th District Court of Appeals upheld the DOL Fiduciary Rule.

It was “argued that the DOL rule treated fixed indexed annuities arbitrarily by forcing the products under the best-interest contract exemption, a provision of the regulation that allows brokers to earn variable compensation as long as they sign a legally binding contract to act in the best interests of their clients.”

Currently, Fixed indexed annuities “operate under the same exemption of federal retirement law as fixed annuities. But the DOL put them under the so-called BICE due to their complexity and the potential conflicts of interest associated with their sales.” 

It was also argued that the “DOL violated rule-making procedures and didn’t do a proper economic impact analysis in promulgating the fiduciary rule.”

“The 10th Circuit judges held that DOL followed appropriate administrative procedure, was fair in its treatment of fixed indexed annuities and that it conducted an appropriate economic analysis.”

(for further info and complete footnotes visit https://advisorskinny.com/2018/03/15/dol-fiduciary-rule-upheld-for-fias/)

4)  MARCH 2018:  The Fifth Circuit Court of Appeals determined the DOL exceeded its statutory authority under ERISA.

The Fifth Circuit Court of Appeals “Held that the agency exceeded its statutory authority under retirement law – the Employee Retirement Income Security Act.

The judges criticized a key provision of the rule, the best-interest-contract exemption. The BICE allows brokers to receive variable compensation for investment products they recommend, creating a potential conflict, as long as they sign a legally binding agreement to act in a client’s best interests.

‘The BICE supplants former exemptions with a web of duties and legal vulnerabilities,” the majority opinion states. “Expanding the scope of DOL regulation in vast and novel ways is valid only if it is authorized by ERISA Titles I and II.’”

(for further info and complete footnotes visit https://advisorskinny.com/2018/03/15/dol-fiduciary-rule-upheld-for-fias/)

What do I think?

My opinion is that the DOL Fiduciary Rule was poorly written, riddled with confusing and fuzzy explanations, entirely underestimated the complexity and economics of the challenge, and shirked regulatory enforcement responsibilities by defaulting to a free-for-all litigious structure.

On the other hand, I believe the industry needs to create a level-playing filed across all licensure so that a customer/investor can understand and expect to experience a professional standard-of-care that does not allow for outlandish claims and sales practices from certain segments of the marketplace as determined by licensure or lack thereof.

Currently, given the existing landscape, I would surmise the odds are in favor of the DOL Fiduciary Rule ultimately being eliminated and/or replaced by a more appropriate ruling from the SEC.  But then again, no one has a crystal ball.

And in the meantime, the DOL Fiduciary Rule Transitional Relief (as described in #1 above) is in force and continues to be the current standard .  As I’ve warned before, advisors must adhere to the DOL rule accordingly (regardless of any ill-conceived advice they may have received elsewhere).

That’s the Skinny,

 

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