Views on improving the integrity of global capital markets
05 October 2018

Fiduciary Duty Takes a Step Back: Industry Reacts to Death of DOL Rule

Posted In: Fiduciary Duty, US SEC

As the SEC sets about reviewing the over 4,000 comment letters it received on its package of proposals relating to a best interest standard for broker-dealers, brokerage houses are already changing some practices in light of this summer’s demise of the US Department of Labor’s (DOL) fiduciary duty rule. Once the period had passed for the DOL to appeal the decision of the US Court of Appeals for the Fifth Circuit to vacate the rule, the brokerage industry lost no time in rolling back some of its policies specifically adopted in response to that rule.

Two examples, in particular, are notable:

  1. Fidelity Investments recently announced that it would no longer serve in the capacity of a fiduciary when it helps employers choose investments for their 401(k) plans. In June 2017, in response to the DOL rule, Fidelity had implemented a policy to allow its advisors to act as what is known as “point in time” fiduciaries for plans that had less than $50 million in assets. Under those arrangements, Fidelity advisors served as “fiduciaries” when they offered an investment recommendation on a one-time basis, but had no ongoing fiduciary duties thereafter. Now that the DOL rule is defunct, Fidelity is reverting to prior practices of providing services to plan sponsors on a similar “point in time” basis, but now in a non-fiduciary capacity.
  2. Merrill Lynch also decided to reverse a policy on commissions that it had adopted in response to the DOL rule. Almost two years ago, Merrill had required its advisors to discontinue commission-based accounts and instead offer only fee-based advisory accounts in light of the perceived heighted liability of commission-based accounts arising from the DOL rule. But recently, Merrill announced it would adopt a new protocol on 1 October 2018 that would again allow its advisors to offer commission-based brokerage accounts; the practice will resume except in the case of annuity products.

Brokerage houses are not the only ones experiencing changes related to the DOL rule’s demise. A recent article reported that the death of the DOL rule is “breathing new life into the variable annuity business.” The second quarter of 2018 saw an increase in sales of variable annuities — the first such increase since 2014 — after consecutive periods of declining sales. Although a number of factors could contribute to rising sales, the one given most weight is the disappearance of the DOL rule; the rule had made selling commission-based annuities legally riskier for brokers and insurers.

Where does this leave the average retail investor when considering future actions, and especially when planning for retirement?

The SEC’s package of regulatory proposals relating to the provision of investment advice by broker-dealers and investment advisers, if implemented, will provide some clarity in this space. For example, one SEC proposal would prohibit brokers from calling themselves “advisers” or “advisors” unless they are registered as investment advisers. Another proposal would raise the standard for broker-dealers providing investment recommendations to investors from “suitability” (the current standard) to a proposed “best interest” standard. Incommentlettersto the SEC on these proposals, CFA Institute suggested substantial changes to the proposals, while applauding the SEC for finally taking action to address mis-selling in the industry.

We hope that even incremental improvements in the regulations governing advice to retail investors will provide sorely needed clarification and protections. However, given the jurisdictional boundaries, new regulations by the SEC unfortunately may not affect the marketing and selling of annuities or other insurance products to unsuspecting buyers, to the extent that such sales fall under the jurisdiction of individual state insurance regulators. Adding to the problem is that the standard for providing retirement advice under ERISA has reverted to an outdated and lenient five-part test.

But there is a bright side. Through the media attention devoted to the protracted DOL rule proposal and adoption process, as well as the heated debate on its merits, we believe that investors have become more aware of the issues involved in asking and paying for investment advice. Through the continued education of retail investors — including plain language disclosures and added transparency — we can hope to foster a community that knows to ask whether the advice provider actually is a fiduciary, or whether the provider instead operates under a lesser and more oblique standard of care that may not put that investor’s interests first.

Image Credit: ©Kristina Strasunske

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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