Views on improving the integrity of global capital markets
06 June 2016

NYSSA Event Unwraps DOL Conflict of Interest (Fiduciary) Rule

When moderator Bob Dannhauser, CFA, head of private wealth management at CFA Institute, asked each panelist last Monday how likely it is that the Department of Labor (DOL) conflict of interest rules will take effect on the April 2017 target date, all answered “100%.” Only time will tell whether this forecast is accurate, especially given that two days after the New York Society of Security Analysts’ (NYSSA) event nine organizations filed a lawsuit to stop implementation of the rules.

If the panelists’ predictions hold true, participants in NYSSA’s Conflict of Interest Rule (Fiduciary Rule) Unwrapped event are a step ahead in navigating the compliance tributaries posed by the DOL’s 1,000 pages of final rules. The expert panelists — Greg Nowak (Pepper Hamilton), Tom Marsh (Deloitte), Rob Sichel (K&L Gates), and Kevin Walsh (Fidelity) — covered a range of topics aimed at highlighting the many business and legal considerations practitioners and firms must address to comply with the rules.

Not All Is Clear in the Rules

Not all aspects of the rules are straightforward or intuitive. For example, although ERISA (Employee Retirement Income Security Act of 1974) did not change, as Sichel noted, a redefinition of the scope of who is a fiduciary has “profound implications for the industry,” and particularly for the discretionary fiduciary. What constitutes a “recommendation” is pivotal, with even suggestions about whether to take or refrain from taking a certain course of action arguably tagging the provider with fiduciary status under the rules.

But the final rules streamline the regulations for “level fee fiduciaries,” making compliance easier for them. Another such nuance involves private funds, which are not subject to ERISA if no more than 25% of assets are from retirement accounts. However, engaging in certain promotional activities with respect to the funds may bump up against the fiduciary definition and trigger the need for compliance with those regulations.

Fees Exposed and Reduced

So, what are the business models that pose insurmountable problems? Nowak noted that the classic example is the retail broker/dealer selling variable annuities with hidden fees or revenue sharing agreements. And although disclosure could cure oversights in the past, that is no longer the case under these conflict of interest regulations. Walsh suggested a multistep framework for evaluating each business model for compliance by asking the following questions:

  • How are you paid?
  • What are your new products and how are you compensated for them?
  • What are possible issues when looking through the lens of existing business and new business models?

Marsh noted that although there is not one response, firms will be looking at client segmentation (for example, high net worth versus lower net worth), with an aim toward reducing risks and limiting platforms.

In regard to what clients should expect, Marsh believes the good news is that the new rules will reduce fees and provide greater transparency around those fees. Sichel thinks more than just fees will be affected; he believes the implicit message from the DOL is that retirement assets are better left in the workplace and that implementation of the rules is intended to curtail rollovers.

Active asset managers, contrary to what many doomsayers say, Marsh contends, will not have “a stake in the heart” because of the rules. Instead, the rules will serve as a rallying cry to get fees to the level they should be in a competitive environment.

Nowak agrees, predicting that managers that provide “pure advice” for a fee will be in high demand. He added that the new rules will force the industry to educate consumers and consequently allow managers to “take control back from distribution.”

All of this, of course, depends on the full implementation of the rules. What effect the ensuing court battle will have on the substance of the rules and effective date will unfold in the coming weeks and probably months. The DOL’s message until then is for investment managers to get their ducks in a row and move toward compliance. April 2017’s effective date will be here soon.

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About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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